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ELEMENTS 
BUSINESS 

HUFFCUT 


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THE    ELEMENTS   OF 
BUSINESS   LAW 


WITH   ILLUSTRATIVE 
EXAMPLES  AND  PROBLEMS 


BY 

ERNEST  W.  HUFFCUT 

'II 

REVISED  BY 

GEORGE  GLEASON  BOGERT 

PROFESSOR  OF   LAW   IN  THE   CORNELL   UNIVERSITY   COLLEGE   OF  LAW 


GINN  AND  COMPANY 

BOSTON     •     NKW    YORK     •     '  UKAGU     •     I.ONIMIN 
ATLANTA     •     DALLAS     •     CiJLUMIUIS     •     SAN    IKANCISCO 


T 
\9I7 


COPYRIGHT,  1905,  BY 
ERNEST  W.  HUFFCUT 


COPYRIGHT,  1917,  BY 
LILLIAN  HUFFCUT 


ALL    RIGHTS    RESERVED 
519.11 


<,1NN   ASl)  C(JM1'ANY  ■  I'RO- 
PKIUTOKS  •  liUSlON  •  U.S.A. 


PREFATORY  NOTE 

An  effort  has  been  made  in  this  book  to  state  as  concisely 
and  clearly  as  possible  the  leading  and  fundamental  principles 
of  business  law,  and  in  place  of  extended  abstract  explanations 
of  them  to  substitute  simple  concrete  examples  showing  them 
in  their  actual  application  to  business  transactions.  In  order 
that  the  conclusions  drawn  in  these  examples  may  be  verified 
and  not  rest  upon  mere  conjecture,  the  examples  have  for  the 
most  part  been  taken  from  cases  decided  in  the  courts.  At  the 
end  of  each  chapter  are  given  a  number  of  concrete  problems 
without  the  conclusions,  intended  to  afford  an  exercise  in  the 
application  of  the  principles  drawn  from  the  text  and  the  exam- 
ples. These  also  have  been  taken  mainly  from  the  decided 
cases.  The  drill  in  the  examples  and  problems  should  be  con- 
stant and  thorough,  and  will  be  found  far  more  interesting  and 
instructive  and  far  better  calculated  to  develop  intelligent  think- 
ing and  reasoning  than  the  memorizing  and  repeating  of  abstract 
dogmatic  statements. 

The  arrangement  of  the  book  has  kept  in  view  a  logical  anal- 
ysis and  unfolding  of  the  subject.  But  if  for  any  reason  it 
should  be  thought  desirable  to  deal  with  negotiable  instruments 
earlier  in  the  course,  it  would  do  equally  well  to  interchange 
Parts  II  and  III,  giving  the  latter  first. 

Should  the  book  prove  too  extended  for  the  time  allotted. 
Parts  V  and  VI  may  be  omitted,  although  it  would  be  well  to 
cover,  if  possible,  the  chapter  on  partnership.  The  last  three 
chapters  do  not  fall  clearly  within  the  scope  of  business  law,  and 
for  this  reason,  and  because  it  has  been  the  object  not  unduly 
to  extend  them,  the  examples  and  problems  have  been  for  tlie 
most  part  omitted  and  numerous  facsimiles  of  formal  documents 
substituted.  While  these  chapters  deal  with  somewhat  technical 
matters,  the  subjects  involved  are  of  great  importance  to  all  who 
have  property  interests. 


iv  PREFATORY  NOTE 

The  glossary  of  Ic^al  terms  should  be  constantly  referred  to, 
in  order  that  the  nomenclature  of  the  law  may  be  correctly 
understood.  While  the  glossary  has  been  made  as  complete  as 
practicable,  it  would  be  well  to  supplement  it  by  a  good  law 
dictionary,  in  which  more  extended  definitions  and  explanations 
may  be  found. 

The  work  is  based  necessarily  upon  the  common  law.  While 
the  nature  of  statutory  ciianges  has  been  indicated,  the  precise 
provisions  of  statutes  are  rarely  given,  because  these  vary  so 
widely  in  the  different  states  that  such  a  course  would  prove 
misleading.  The  difficulties  of  an  accurate  statement  of  the 
statutory  law  in  a  book  of  this  size  are  in  fact  insurmount- 
able. Should  the  teacher  be  fortunate  enough  to  secure  the 
cooperation  of  a  local  attorney,  some  progress  in  this  direction 
might  be  made. 

It  will  be  found  in  setting  examinations  that  concrete  prob- 
lems are  better  calculated  to  disclose  the  practical  value  of  the 
student's  work  than  questions  calling  mainly  for  definitions, 
rules,  or  abstract  statements.  E   W    H 

Cornell  University  College  of  Law 
July  3,  1905 


PREFACE  TO  SECOND  EDITION 

During  the  eleven  years  which  have  elapsed  since  the  first 
edition  of  this  book  was  published  there  have  occurred  many 
changes  in  American  law  which  render  desirable  a  revision. 
Numerous  alterations  in  the  seventeenth  section  of  the  Statute 
of  Frauds;  the  increasing  importance  of  the  antitrust  legislation; 
several  amendments  to  the  federal  bankruptcy  law ;  the  adoption 
by  many  states  of  the  various  uniform  laws,  notably  the  Uniform 
Sales  Act,  Uniform  Warehouse  Receipts  Law,  Uniform  Bills 
of  Lading  Act,  and  Uniform  Stock  Transfer  Act ;  the  recent 
amendments  to  the  Interstate  Commerce  Act  regarding  carriers  ; 
the  approval  by  the  Interstate  Commerce  Commission  of  a  new 
form  of  bill  of  lading ;  the  passage  of  the  Federal  Reserve  Act ; 
changes  in  the  rates  of  interest,  especially  in  the  Western  states  ; 
the  almost  complete  abolition  of  days  of  grace ;  the  rapid  spread 
of  the  Negotiable  Instruments  Law ;  the  revolution  in  the  law  of 
master  and  servant  caused  by  the  Employers'  Liability  and  Work- 
men's Compensation  acts  ;  and  the  increase  in  the  popularity  of 
the  Torrens  system  of  land  registration  —  all  have  necessitated 
changes  in  the  text.  Many  other  minor  alterations  in  the  interest 
of  accuracy  and  completeness  have  been  occasioned  by  the  growth 
of  the  law. 

It  would  be  difficult  to  improve  upon  the  admirable  lucidity 
and  compactness  of  Dean  Huffcut's  style.  Hence  the  new  mat- 
ter introduced  relates  largely  to  substance  and  not  to  diction. 

I  desire  to  add  that  it  is  a  particular  satisfaction  to  be 
accorded  the  privilege,  by  this  revision  of  the  work  of  the 
late  Dean  Iluffcut,  of  paying  a  meed  of  gratitude  to  a  teacher 
for  whom  I  entertained  a  warm  personal  regard,  and  whose 
legal  exposition,  in  classroom  or  in  printed  text,  was  distin- 
guished  by  remarkable  analytical   power  and  by  singular  clarity 

and  accuracy  of  expression. 

GEORGE  G.  BOGERT 
CoRNKi.i,  Umvkrsity  Coi,lf.c;e  ov  Law 
Ithaca,  New  York 


Digitized  by  the  Internet  Archive 

in  2008  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/businesslawOOhuff 


CONTENTS 

CHAPTER  I.    PRELIMINARY  TOPICS 
Business  Law  and  Cognate  Subjects 


SECTION 


PAflE 

1.  Business ^ 

2.  Law ^ 

3.  Business  law - 

4.  Divisions  of  the  law 3 

5.  Property 4 

6.  Legal  obligations 4 

7.  Courts " 

8.  Procedure ° 

9.  Scope  of  this  work 9 

PART  L    THE  PRINCIPLES  OF  CONTRACT 
CHAPTER  II.    FORMATION  OF  CONTRACTS 

10.  Definition  of  contract 1 1 

11.  Essentials  of  enforceable  contract 12 

I.    Agreement 

12.  Contracts  begin  in  agreement .  12 

13.  Classes  of  agreements '3 

14.  Agreements  originate  in  some  form  of  offer  and  acceptance      ...  13 

II.    Competent  Parties 

15.  Infants '7 

16.  Insane  persons '° 

17.  Married  women '9 

III.    Consideration 

18.  Necessity  of  con.sidcration '9 

19.  The  consideration  need  not  equal  the  promise  in  value 20 

20.  A  past  consideration  will  not  support  a  promise 21 

21.  The  consideration  must  be  legal 22 

vii 


viii  CONTENTS 

IV.    l'\)RM  :    W'kiriNf. ;    SiCAL 

SECTION  PAGE 

22.  Statute  of  Frauds 23 

23.  Contracts  under  seal 25 

V.     Lw.AI.lTY    OK    OrJECT 

24.  Contracts  made  illegal  by  statute 27 

25.  Wagering  contracts 28 

26.  Contracts  illegal  at  common  law 30 

27.  Effect  of  illegality  upon  contracts  in  which  it  exists 32 

VI.    Reaijty  of  C0N.SENT 

28.  Mistake 33 

29.  Fraud  and  misrepresentation 35 

30.  Duress      .          ., 36 

31.  Undue  influence 37 


CHAPTER  III.   OPERATION  AND  DISCHARGE  OF  CONTRACTS 

I.    Liabilities  and  Rights  of  Third  Parties 

32.  Liability  of  third  parties 45 

33.  Rights  of  third  parties 46 

II.  Assignment  of  Contracts 

34.  Assignment  by  act  of  the  parties 46 

35.  Negotiability  of  certain  contracts 47 

36.  Assignment  by  operation  of  law 48 

III.  Discharge  of  Contracts 

37.  Discharge  by  agreement,  including  performance 49 

38.  Discharge  by  impossibility  of  performance 51 

39.  Discharge  by  breach 53 

40.  Remedies  for  breach  of  contract 54 

IV.  Discharge  in  Bankruptcy 

41.  Insolvency  laws  not  discharging  debtor 56 

42.  Bankruptcy  laws  discharging  debtor 56 

43.  The  state  insolvency  laws 57 

44.  National  Bankruptcy  Law  of  i8g8 57 


CONTENTS  ix 

PART  II.  PARTICULAR  CONTRACTS  CONCERNING 

GOODS 

CHAPTER  IV.    SALES  OF  GOODS 

I.    The  Contract 

SECTION  PAGE 

45.  Definition  and  analysis 61 

46.  Statute  of  Frauds 66 

II.    The  Title 

47.  \Vhen  does  title  pass  ? 6g 

48.  Specific  or  ascertained  goods 70 

49.  Unascertained  goods 72 

50.  Who  has  the  risk.^       74 

III.    Performance 

51.  Duties  of  the  seller 75 

52.  Duties  of  the  buyer 75 

IV.    Warranties 

53.  Definition  and  classification 76 

54.  Express  warranties 76 

55.  Implied  warranties        77 

56.  The  rule  of  caveat  emptor 79 

57.  Remedies  for  breach  of  warranty 80 

V.    Remedies 

58.  Rights  of  unpaid  seller  against  the  goods 81 

59.  Rights  of  unpaid  seller  by  way  of  action  for  breach  of  contract      .     .  83 

60.  Remedies  of  the  buyer      ...  84 

CHAPTER  V.    liAILMENT  OF  GOODS 

61.  Definition  and  distinctions 90 

62.  Classification  of  bailments 9' 

I.    P.ailments  .solely  for   Penefit  of  One  1'arty 

63.  Pailmcnts  for  sole  benefit  of  bailor 93 

64.  Bailments  for  bailee's  sole  benefit 95 


X  CONTENTS 

11.     MUTUAL-BliNlCKIT    BAILMENTS 

SECTION  PAGE 

65.  riedgc  or  pawn 97 

66.  Hailce  hires  an  article  of  bailor 99 

67.  Uailor  cngaj;cs  bailee  to  keep,  repair,  or  transport  an  article   .     .     .  loi 

III.  Sri-xiAL  Cases  ok  Bailment  for  Keeping  or  Transportation 

68.  Innkeepers 104 

69.  Common  carriers  of  goods 107 

IV.    Cases  not  Strictly  of  Bailment 

70.  Public  carriers  of  passengers  and  baggage 116 

7 1 .  Telegraph  and  telephone  companies 118 


CHAPTER  VI.    INSURANCE  CONTRACTS 


72.  Nature  and  kinds  of  insurance 

73.  Kinds  of  policies 

74.  Definitions 

75.  Characteristics       

76.  The  insured  must  have  an  insurable  interest 

77.  The  contract  of  insurance  is  one  requiring  the  highest  good  faith 

78.  Warranties 

79.  Statutory  or  standard  policies 

80.  Marine  insurance 


PART  III.    PARTICULAR  CONTRACTS  CONCERNING 
CREDITS 

CHAPTER  VII.    CREDITS  AND  LOANS 

81.  Capital  and  credit ;  money  and  exchange  ;  payment 135 

82.  Interest  and  usury 140 

83.  Banks 142 

84.  Bank  deposits 144 

85.  Loans  and  discount;  security 145 

CHAPTER  VIII.  THE  CONTRACT  OF  GUARANTY 

86.  Guaranty  defined 149 

87.  A  guaranty  must  be  in  writing 150 

88.  Consideration r  50 

89.  Notice  of  acceptance  by  guarantee 151 


CONTENTS  xi 

SECTION  PAGE 

90.  Notice  to  guarantor  of  the  default  of  the  principal 151 

gi.   What  will  discharge  the  guarantor 152 

92.  Guarantor's  liability 155 

93.  Guarantor's  remedies 1 55 


CHAPTER   IX.    NEGOTIABLE  INSTRUMENTS 

I.    Nature  and  Characteristics 

94.  Kinds  of  negotiable  instruments I5"9 

95.  Characteristics  of  negotiable  instruments 161 

96.  Definitions 163 

97.  Negotiable  Instruments  Law ...  170 

IL    Form 

98.  What  a  negotiable  instrument  must  contain 170 

99.  What  a  negotiable  instrument  must  not  contain 172 

100.  Nonessentials 1 73 

loi.   Effect  of  blanks I74 

102.  Delivery I74 

III.    Negotiation 

103.  Negotiation;  indorsement;  delivery 175 

104.  Holder  in  due  course I77 

105.  Rights  of  holder  in  due  course i  79 

IV.  Maker's  and  Acceptor's  Contract 

1 06.  Maker's  contract  on  a  promissory  note 181 

107.  Acceptor's  contract  on  a  bill  of  exchange 181 

108.  Presentment  of  bill  of  exchange  for  acceptance 185 

V.  Drawer's  and  Indorser's  Contract 

109.  Drawer's  contract  on  a  bill  of  exchange 186 

110.  I  ndorser's  contract  on  a  bill  or  note 186 

111.  Presentment  for  payment ^^^ 

112.  Notice  of  dishonor '9' 

1 13.  Protest '94 

1 1 4.  Checks        '9'^ 

115.  Position  of  indorser  after  liability  is  fixed 199 


xu 


CONTENTS 


TARr  IV.    AGKNCV:    Till-:  CONDUCT  OF   BUSINESS 
rilROUGH  REPRESENTATIVES 

CHAl'TKR  X.    rRINCll'AL  AND  AGENT 

SECTION  I-AGE 

1 1 6.  Agency:  its  divisions  and  problems 205 


I.    Appointment  ok  Agents 


I  1  7.  Wlio  niav  appoint  agents 

1 18.  Who  may  be  an  agent  . 

1 1 9.  Form  of  appointment    . 

1 20.  Ratification     .... 

121.  Agency  by  necessity 

122.  Termination  of  agency 

123.  Irrevocable  agencies 


207 
208 
210 
210 
2 1  2 
212 
213 


II.    Obligations  of  Principal  and  Agent  to  Each  Other 

124.  Obligations  of  principal  to  agent 213 

125.  Obligations  of  agent  to  principal 214 

III.    Liability  of  Principal  to  Third  Parties 

1 26.  General  Rules 217 

127.  Agent's  apparent  authority 217 

128.  Agents  following  customary  calling 219 

129.  Undisclosed  principal 220 

130.  Frauds  by  agent 222 

IV.    Liability  of  Agent  to  Third  Parties 

131.  Where  agent  alone  is  liable 222 

132.  Where  both  principal  and  agent  are  bound 223 

CHAPTER  XI.    MASTER  AND  SERVANT 
I.    Injuries  to  Third  Persons 

133.  Negligent  torts  by  servants 227 

134.  Willful  torts  by  servants 227 

II.    Injuries  to  Servants 

135.  Injury  to  one  servant  by  another 228 

136.  The  master's  nonassignable  duties 229 

137.  Employers'  liability  acts 229 

138.  Workmen's  compensation  and  insurance  acts 230 


CONTENTS  xiii 
PART  V.    BUSINESS  ASSOCIATIONS 

CHAPTER  XII.    PARTNERSHIPS  AND  JOINT-STOCK 
COMPANIES 

SECTION  PAGE 

139.  Forms  of  conducting  business 235 

I.    Partnerships 

140.  What  constitutes  a  partnership 236 

141.  Rights  and  duties  of  partners  as  to  each  other 238 

142.  Powers  of  partners 239 

143.  Liabilities  of  partners 240 

144.  Rights  and  remedies  of  creditors 241 

145.  Dissolution 242 

II.    Joixt-Stock  Companies 

146.  How  distinguished  from  ordinary  partnerships 243 

147.  How  hke  ordinary  partnerships 244 

CHAPTER  XIII.    CORPORATIONS 

148.  Definition  and  classification .  248 

1 49.  How  a  corporation  is  formed 248 

150.  Members 250 

151.  Directors 252 

152.  Officers  and  agents 253 

153.  Powers  of  a  corporation 254 

154.  Stockholders'  rights ~5S 

155.  Liability  of  stockholders 257 

156.  Reports  of  corporations .          .     ,  c""/ 

157.  Receivers  of  corporations 258 

I  58.   Dissolution  of  corporations 258 

PART  VI.    PROPERTY  IN  LAND  AND  MOVABLES 

CHAPTER  XIV.    REAL  PROPERTY 

I.    Estatf:s  in  Real  Property 

159.  Meaning  of  the  term  "  property  " 261 

160.  Estates  in  land;  duration 264 

161.  Future  estates  in  land  :   reversions  and  remainders 267 

iC>2.   Estates  held  jointly  or  in  common 268 

163.   Equitable  estates :   trusts 269 


xiv  CONTENTS 

11.   Land:  its  Constituknts,  Growths,  and  Fixtures 

SECTION  PAGE 

164.  Extent  of  ownership  :  soil,  air,  minerals,  waters 270 

165.  \'ef;;ctable  products 270 

166.  Fixtures 271 

III.    Relative  Rights  ov  Adjoining  Owners 

167.  Fences:  cattle  trespass 273 

168.  Air  and  waters  ;  support  of  land 273 

169.  Easements 274 

IV.    Transfer  of  Interests  in  Lands 

170.  Contract  of  sale 274 

171.  Conveyances 276 

172.  Wills 277 

1 73.  Descent  to  heirs 280 

1 74.  Adverse  possession        282 

V.    Mortgages  and  Liens 

175.  Mortgages  of  real  property 282 

1 76.  Liens  on  real  property 283 

VI.    Landlord  and  Tenant 

177.  The  lease  and  its  covenants 288 

178.  Defects,  repairs,  and  waste 290 

179.  Assignment  and  subletting 291 

180.  Rent  and  remedies  for  nonpayment 291 

181.  Termination  of  lease 292 

CHAPTER  XV.    PERSONAL  PROPERTY 
I.    Classification  :    Kinds  and  Estates 

182.  Classification 294 

183.  Property  in  animals 294 

1 84.  Trademarks ;  good  will ;  names 295 

185.  Estates  in  personal  property 296 

11.    Acquisition  and  Transfer 

186.  Acquisition  by  occupancy  and  by  finding  lost  property      ....  297 

187.  Accession  and  confusion 298 

188.  Transfer  by  gift 300 

189.  Other  modes  of  transfer 302 

GLOSSARY 305 

INDEX 313 


THE  ELEMENTS  OF 
BUSINESS  LAW 

CHAPTER  I 

PRELIMINARY  TOPICS 

Business  Law  and  Cognate  Subjects 

1.  Business.  Business  concerns  itself  with  property,  credit, 
and  services,  and  with  contracts  pertaining  to  these  things. 

The  term  "'  business  "  embraces  every  kind  of  industrial  activity 
by  which  men  acquire,  manufacture,  or  otherwise  produce  prop- 
erty;  by  which  they  sell  or  transfer  it;  by  which  they  store, 
transport,  or  insure  it ;  by  which  they  borrow  or  lend  money 
and  give  or  secure  credit ;  by  which  they  combine  with  others 
to  these  ends ;  and  by  which  they  furnish  or  obtain  services  in 
these  and  similar  enterprises.  This  is  by  no  means  an  exhaus- 
tive list  of  commercial  operations,  but  it  indicates  the  variety 
and  extent  of  those  human  activities  that  pass  under  the  name 
of  business. 

2.  Law.  The  term  "law"  includes  all  those  rules  by  which 
courts  are  controlled  in  the  administration  of  justice.  The  same 
rules  must  also  govern  men  in  their  relations  to  each  other, 
because  if  they  be  violated,  the  courts  will  either  give  repara- 
tion to  the  injured  party  or  refuse  to  aid  the  one  who  has 
violated  them. 

Rules  of  law  are  of  two  kinds  :  first,  those  that  have  been 
worked  out  by  the  courts  themselves  in  deciding  actual  cases 
brought  brfore  them  by  litigants ;  and,  second,  those  enacted 
by  the  legislatures.  The  first  are  known  as  the  common  law, 
and  the  second  as  statute  law.  The  common  law  is  sometimes 
called  the  unwritten  law,  and  statute  law  is  sometimes  called  the 
written   law. 


2  PRKLIMINARV   TOPICS  [Ch.  I 

1 .  Common  /,r:c'.  The  common  law  is  llicrefore  the  law  declared 
by  judi;cs  in  the  decision  of  cases.  It  rests  primarily  upon  custom, 
because  in  deciding  cases  the  judges  seek  to  give  effect  to  the 
prevailing  customs  of  the  people  in  their  relations  and  dealings 
with  each  other.  But  when  a  point  of  law  is  once  decided,  sub- 
sequent judges  in  the  same  jurisdiction  follow  it  as  a  precedent, 
and  the  point  is  said  to  be  decisively  setded.  This  is  known  as 
the  doctrine  of  sftrn-  decisis,  —  the  doctrine  that  courts  must 
stand  by  decided  cases,  uphold  precedents,  and  maintain  former 
adjudications.  With  the  lapse  of  time,  therefore,  the  greater 
number  of  the  ordinary  questions  that  may  arise  have  been  thus 
settled  and  the  common  law  established.  The  rules  must  be 
sought  in  the  printed  reports  of  the  decisions  of  the  courts. 

2.  Statute  lazv.  Statute  law  consists  of  the  enactments  of 
legislatures.  These  may  be  for  the  purpose  of  changing  some 
rule  established  by  the  courts  when,  for  example,  the  develop- 
ment of  society  makes  the  continuance  of  the  old  rule  inexpe- 
dient, or  for  the  purpose  of  codifying  into  a  brief  statute  the 
rules  scattered  through  hundreds  or  even  thousands  of  volumes 
of  reported  cases.  The  whole  law  of  negotiable  instruments  has 
been  thus  codified  in  England  and  in  many  of  our  American 
states  (see  sect.  97  post). 

For  the  law  of  any  state,  therefore,  one  must  consult  the  statutes  of  that 
state  and  the  reports  of  its  courts.  In  some  states  the  reports  are  very  numer- 
ous. For  example,  there  are  in  New  York  upwards  of  one  thousand  volumes, 
in  Massachusetts  more  than  two  hundred  volumes,  and  in  all  the  states 
combined,  over  ten  thousand  volumes.  A  statute  or  decision  is  not  binding 
except  in  the  state  where  enacted  or  rendered.  Hence  it  follows  that  the  law 
may  be  one  way  in  Massachusetts  and  just  the  opposite  in  New  York.  As  we 
have  the  federal  Congress  and  courts,  and  forty-eight  state  legislatures  and 
courts,  not  to  mention  territories  and  dependencies,  it  will  be  seen  that  the 
American  law  may  present  many  diverse  enactments  or  decisions  upon  the 
same  question.  This  is  what  makes  it  very  difficult  in  this  country  to  present 
a  statement  of  the  law  which  is  correct  for  every  jurisdiction. 

3.  Business  law.  Business  law  is  that  portion  of  the  general 
law  which  governs  business  transactions.  While  the  term  is  fre- 
quently used  as  if  it  denoted  a  distinct  body  of  law  susceptible 
of  accurate  definition,  it  is  in  reality  a  term  of  vague  meaning. 
One  engaged  in  business  transactions  may  be  confronted  with 


§4]  DIVISIONS   OF  THE  LAW  3 

legal  questions  involving  almost  any  topic  of  the  law,  and  hence 
might  need  advice  from  an  expert  or  might  in  simple  cases  be 
able  to  solve  the  difficulty  for  himself.  The  most  that  any  law 
book  for  business  men  can  well  undertake  to  do  is  to  present 
the  elementary  principles  governing  the  ordinary  business  trans- 
actions, leaving  for  lawyers  the  more  intricate  or  technical  prob- 
lems. The  chief  aim  of  such  a  book  should  be  to  inform  the 
business  man  how  to  keep  out  of  difficulties,  rather  than  to  enable 
him  to  extricate  himself  after  he  is  once  involved. 

Business  law  is,  therefore,  merely  such  a  selection  from  the 
general  body  of  the  law,  and  especially  the  law  of  contract,  as 
a  particular  author  may  think  it  profitable  for  a  business  man 
to  know. 

4.  Divisions  of  the  law.  The  law  may  be  divided  into  two 
great  branches,  public  law  and  private  law. 

1.  Public  laze.  Public  law  includes  those  topics  with  which 
the  state,  that  is,  the  public  as  a  whole,  is  especially  concerned  : 
namely,  (a)  international  law,  or  the  law  governing  the  relations 
of  one  nation  to  other  nations  ;  {b)  constitutional  law,  or  the 
fundamental  law  governing  a  nation  or  state  in  its  relations  to 
its  citizens ;  {c)  criminal  law,  or  the  law  by  which  the  public 
protects  itself  against  crimes  and  offenses  prejudicial  to  its 
well-being ;  and  {d)  administrative  law,  or  the  law  under  which 
governmental  affairs  are  carried  on,  as  tax  laws,  highway  laws, 
and  the  like. 

2.  Prii'iitc  lati'.  Private  law  includes  those  topics  with  which 
individuals  are  particularly  concerned  in  their  private  relations. 
These  are  very  numerous  but  may  be  roughly  grouped  under 
three  main  heads :  namely,  {a)  the  law  of  property,  including 
accjuisition,  ownership,  possession,  security,  alienation,  descent, 
and  the  like  ;  (b)  the  law  of  obligation,  including  contracts,  torts, 
trusts,  and  the  like  ;  and  {c)  the  law  of  procedure,  or  the  law 
by  which  cases  arc  brought  into  courts  and  conducted  to  trial 
and  judgment. 

The  to])ics  treated  under  the  head  of  business  law  are  those  in- 
volving either  the  law  of  property  or  the  law  of  obligatif)n.  The 
acquisition  and  disposition  of  property,  the  making  and  perform- 
ing of  contracts,  constitute  the  major  i)art  of  a  business  enterprise. 


4  PRELIMINARY  'IX)1MCS  [Ch.  I 

5.  Property.  Property  consists  in  the  ownership  of  material 
objects,  or  the  ownership  of  some  rij;ht  in  or  to  a  material  object, 
or  the  ownership  of  some  riglit  against  a  person,  or  the  owner- 
ship of  some  immaterial  right  to  be  exercised  to  the  exclusion  of 
others.  Material  objects  are  either  immovable,  like  land,  or  mov- 
able, like  coin,  cattle,  or  merchandise.  One  may  own  and  pos- 
sess these  things,  or  he  may  own  a  right  in  them,  as  when  he 
has  a  right  to  cross  another's  lands  or  a  right  to  sell  another's 
goods  pledged  to  him  for  a  debt.  Immaterial  property  may  con- 
sist in  a  right  granted  by  statute  or  usage  to  the  exclusion  of 
others,  as  a  right  to  a  patent  or  to  a  trade-mark ;  or  it  may 
consist  of  a  right  against  a  person,  as  a  right  to  compel  him 
to  pay  a  promissory  note  or  to  pay  damages  for  a  trespass  to 
property. 

The  law  regards  property  as  either  real  property  or  personal 
property. 

1 .  Real  property.  Real  property  consists  of  any  estate  or  inter- 
est in  lands,  except  a  leasehold  estate  for  years  or  a  mortgage  or 
lien.  There  are  two  such  estates  :  an  estate  of  inheritance,  or,  as 
it  is  often  called,  an  estate  in  fee,  which  is  an  estate  that  descends 
to  the  owner's  heirs ;  and  an  estate  for  life  which  terminates  at 
the  death  of  the  owner  or  of  some  other  designated  person  (see 
sect,  i6o  post). 

2,  Personal  property.  All  other  property  is  personal  property. 
This  includes  (i)  chattels  real,  that  is,  leasehold  interests  in 
lands  ;  (2)  chattels  personal,  that  is,  all  other  kinds  of  property, 
consisting  of  the  following  classes  :  {a)  corporeal  movable  objects; 
ib)  incorporeal  rights  or  privileges,  like  patents,  copyrights,  trade- 
marks, and  good  will  in  a  business ;  {c)  rights  of  action  against 
persons,  called  choses  in  action  {choses  is  the  French  for  "  things  "). 

The  kinds  of  property  with  which  business  is  chiefly  con- 
cerned are  corporeal  movable  objects  and  choses  in  action. 
The  former  are  goods,  wares,  and  merchandise  ;  the  latter  are 
negotiable  instruments,  stocks  and  bonds,  mortgages  and  liens, 
and  debts  in  general. 

6,  Legal  obligations.  Legal  obligations  are  those  which  the 
law  enforces.  They  arise  either  by  agreement  or  by  the  policy 
of  the  law,  independent  of  an  agreement. 


§6]  LEGAL   OBLIGATIONS  5 

1.  Contract.  An  agreement  enforceable  at  law  we  call  a  con- 
tract, and  the  failure  or  refusal  to  carry  out  the  agreement  we 
call  a  breach  of  contract. 

Exatnple  i .  A  agrees  with  B  that  A  shall  sell  and  B  shall  buy  A's  bicycle 
tor  S30.  This  is  a  contract.  If  either  party  refuses  to  carry  out  his  part  of  it, 
the  other  has  a  case  at  law  for  damages. 

Contracts  have  to  do  with  a  great  variety  of  interests,  and 
many  special  kinds  of  contracts  may  be  enumerated,  such  as 
contracts  of  sale,  contracts  of  bailment,  contracts  of  carriage, 
contracts  of  insurance,  contracts  of  partnership,  contracts  of 
guaranty,   contracts  for  the  loan   of  money,   and   the  like. 

2.  Tort.  The  obligations  fixed  by  private  law  independent 
of  agreement  have  no  specific  names,  but  the  breach  of  any 
of  these  obligations  is  called  a  tort,  which  is  simply  the  French 
word  for  "'  wrong."     Many  of  these  torts  have  specific  names. 

Examples:  2.  A  strikes  B  in  anger.  A  has  committed  the  tort  called 
assault  and  battery. 

3.  C  goes  without  permission  on  D's  land.  C  has  committed  the  tort 
called  trespass. 

4.  E  speaks  false  and  malicious  words  derogatory  to  F's  character.  E  has 
committed  the  tort  called  slander.   If  E  writes  the  words,  the  tort  is  called  libel. 

5.  G  drives  so  carelessly  in  the  street  as  to  run  into  and  injure  H's  carriage. 
G  has  committed  the  tort  known  as  negligence. 

In  each  of  the  above  cases  the  wrongdoer  was  under  an 
obligation  fixed  by  the  law  not  to  infringe  the  personal  security 
or  property  rights  of  another  to  his  damage,  and  to  use  due 
care  for  the  safety  of  others  and  their  property.  The  violation 
of  this  obligation  constitutes  the  tort. 

Where,  in  the  formation  of  a  contract,  one  party  knowingly 
makes  a  false  representation  to  the  other,  a  tort  is  committed. 
Where,  after  a  contract  is  made,  a  stranger  to  it  induces  one 
of  the  parties  to  break  it,  a  tort  is  also  committed. 

Examples ;  6.  A  wishes  to  sell  sheep  to  B.  He  tells  B  that  they  are  sound 
and  healthy.  He  knows  they  are  diseased.  B  buys  the  sheep  and  afterwards 
discovers  that  they  are  diseased,  (a)  There  is  a  contract  between  A  and  B. 
(6)  There  is  a  tort,  known  as  deceit,  committed  by  A. 

7.  A  agrees  to  work  for.  B.  X,  knowing  this,  induces  A  to  break  the  contract. 
.X  has  committed  a  tort  which  has  no  very  specific  name.  It  is  called  "  inducing 
breach  of  contract,"  or,  in  this  form  of  contract,  "  enticing  away  a  servant." 


6  PKKI.IMINARV  TOPICS  [Cii.  I 

3.  Qtiasi-iontniits.  In  certain  cases  where  there  is  no  true 
contractual  ajjjrcenient,  the  law,  by  reason  of  some  act  or  situa- 
tion of  a  party,  imposes  an  oblii^ation  ui)on  him  and  gives  a 
remedy  against  him,  as  if,  in  fact,  his  obligation  did  arise  from 
agreement.  In  order  to  prevent  unjust  enrichment  and  to  give 
an  etlicient  remedy,  the  law  indulges  in  such  cases  the  fiction 
that  a  promise  was  made,  and  permits  an  action  in  the  form  of 
an  action  on  contract.  These  cases  are  called  quasi-contracts, 
because  the  form  of  remedy  is  like  that  in  the  case  of  a  true 
contract. 

Examples :  8.  A  steals  B's  money.  B  may  recover  the  money  in  a  con- 
tract action,  there  being  by  fiction  of  law  an  implied  promise  to  repay  it. 

9.  C  by  mistake  pays  D  more  than  he  owes.  C  may  recover  the  excess  in 
a  contract  action.   The  law  implies  a  promise  by  D  to  return  the  overpayment. 

10.  E  is  a  lunatic,  known  to  be  one,  and  incapable  of  making  a  contract. 
F  furnishes  E  with  necessary  food.  F  may  recover  the  reasonable  value  of 
the  food  in  a  contract  action.  The  law  creates  the  promise  of  the  lunatic  to 
pay  for  necessaries. 

4.  Tnists.  A  trust  is  an  obligation  of  one  who  has  the  legal 
title  to  property  to  account  for  it  to  one  who  has  the  beneficial 
or  equitable  interest.  Trusts  are  not  recognized  or  enforced  by 
the  courts  known  as  the  law  courts,  but  by  the  courts  known 
as  the  equity  or  chancery  courts.  These  courts  are  explained 
in  the  next  section.  Law  courts  recognize  only  legal  titles  and 
interests,  but  equity  courts  recognize  equitable  titles  and  interests. 

Example  il.  B' conveys  or  wills  his  farm  in  trust  to  C  to  receive  the  rents 
and  income  and  pay  the  same  over  to  D.  This  is  a  trust.  D's  rights  are  not 
recognized  by  the  law  courts,  but  the  equity  courts  recognize  and  enforce  D's 
rights  and  compel  C  to  account  to  D  for  the  rents  and  income. 

The  so-called  "  trusts  "  referred  to  in  current  economic  discussions  are  not 
now  trusts  in  the  above  sense,  but  are  simply  monopolistic  combinations. 
Originally  stockholders  in  various  corporations  placed  their  shares  in  trust 
with  a  committee,  and  the  total  profits  of  all  the  corporations  were  divided 
among  the  various  stockholders  p7o  I'ata,  thus  constituting  a  real  trust.  But 
it  is  now  the  custom  to  unite  all  the  corporations  into  one  corporation,  in 
order  to  eliminate  competition.  This  does  not  create  a  true  trust,  but  the  old 
name  continues  to  be  used  to  describe  the  new  monopolistic  device. 

7.  Courts.  The  courts  of  a  particular  state  -^ay  consist  of 
law  courts  and  equity  courts,  although   in  modern  times  these 


§.7]  COURTS  7 

are  often  combined.    The  United  States  has  also  an  admiralty 
court,  or  rather  a  court  with  admiralty  jurisdiction. 

1.  Law  courts.  Law  courts  are  organized  tribunals  for  the 
trial  of  cases  and  the  hearing  of  appeals.  Each  state  has  trial 
courts  and  at  least  one  court  to  which  appeals  may  be  taken. 
Trial  courts  consist  of  a  judge  and  a  \\iry,  with  attendant  officers. 
Appellate  courts  consist  of  a  bench  of  judges  without  a  jury. 

The  trial  courts  are  generally  the  following : 

a.  A  court  of  general  jurisdiction  is  one  before  which  most 
cases  may  be  brought.  This  is  usually  called  a  circuit  court, 
because  the  judges  go  on  circuit  from  place  to  place  to  hold 
trials. 

b.  Courts  of  limited,  or  local,  jurisdiction  are  for  the  trial  of 
smaller  cases ;  such  are  county  courts,  city  courts,  and  courts 
held  by  justices  of  the  peace, 

c.  Courts  for  the  administration  of  the  estates  of  deceased 
persons  are  called  the  surrogate's  court,  probate  court,  orphans' 
court,  etc. 

The  appellate  courts  are  those  to  which  appeals  are  taken 
from  the  trial  courts.  Most  states  call  the  appellate  courts  the 
Supreme  Court.  In  New  York,  however,  the  highest  appellate 
court  is  called  the  Court  of  Appeals,  and  the  trial  court  of 
general  jurisdiction  is  called  the  Supreme  Court,  Owing  to  the 
large  amount  of  appellate  work,  some  states  have  an  intermedi- 
ate appellate  court.  In  New  York  this  is  called  the  Appellate 
Division  of  the  Supreme  Court, 

In  the  federal  jurisdiction  the  trial  court  is  the  District  Court ; 
the  intermediate  appellate  court  is  the  Circuit  Court  of  Appeals, 
and  the  highest  appellate  court  is  the  Supreme  Court, 

2.  Equity  courts.  Side  by  side  with  the  common-law  .  courts 
there  grew  up  in  England  a  separate  court  known  as  the  equity 
court  or  the  chancery  court.  This  court  consisted  of  a  judge 
without  a  jur\',  and  was  intended  to  give  relief  in  hard  cases 
where,  by  the  somewhat  rigid  rules  of  the  common-law  courts, 
none  could  be  had.  A  body  of  rules  or  doctrines  evolved  by 
this  court  is  known  as  equity.  Equity  consists,  therefore,  of 
the  rules  and  doctrines  by  which  equity  courts  arc  controlled 
in  the  administration  of  justice. 


8  I'KKLIMINARY  TOIMCS  L<-'"- I 

In  a  few  of  our  stales  sueh  separate  equity  courts  still  exist, 
but  generail)-  the  powers  of  a  common-law  court  and  of  an 
equity  court  have  been  combined  in  one  court  which  administers 
both  law  and  equity.  In  such  case  the  court  of  general  jurisdic- 
tion is  both  a  common-law  and  an  equity  court.  If  one  wished 
to  sue  for  broach  of  contract  or  for  an  accounting  for  a  trust,  he 
would  go  before  the  same  court :  in  the  contract  case  the  judge 
with  a  jury  would  administer  law  rules  ;  in  the  trust  case  the  judge 
without  a  jury  would  administer  equity  rules. 

3.  Admiralty  courts.  Admiralty  courts  administer  still  a  dif- 
ferent law,  known  as  the  admiralty  law  or  law  of  the  sea.  They 
have  to  do  with  vessels  and  their  cargoes  and  crews  upon  public 
navigable  waters.  There  is  no  separate  court  of  admiralty  in  the 
United  States ;  the  District  Courts  of  the  United  States  have 
admiraltv  jurisdiction  and  administer  admiralty  law.  State  courts 
have  no  admiralty  jurisdiction.  An  admiralty  court  consists  of  a 
judge  without  a  jury.  The  judge  is  the  trier  of  the  facts  as  well 
as  the  administrator  of  the  law. 

8.  Procedure.  A  case  is  brought  before  a  court  by  pleadings. 
The  plaintiff  makes  a  complaint  or  declaration,  setting  out  his  cause 
of  action,  and  a  summons  to  appear  and  answer  this  is  served 
upon  the  defendant.  The  latter  makes  an  answer  to  the  complaint. 
Upon  these  documents,  or  others  which  may  be  allowed,  the  issue 
is  framed,  that  is,  the  question  in  dispute  is  made  clear. 

At  a  time  appointed  the  parties  go  before  the  court  with  their 
attorneys  and  witnesses  and  give  evidence  to  sustain  their  con- 
tentions. The  jury  is  instructed  by  the  judge  as  to  the  law  of 
the  case,  and  renders  its  verdict  upon  the  facts  proved  and  the 
instructions  received.  The  court  enters  a  judgment  in  accordance 
with  this  verdict. 

The  defeated  party  may  appeal  from  this  judgment.  His  at- 
torney prepares  a  transcript  of  the  evidence,  and  with  this,  upon 
notice  to  his  adversary,  goes  before  an  appellate  court  of  judges 
and  asks  to  have  the  judgment  reversed.-  Argument  by  both 
parties  is  heard  by  the  appellate  court.  If  the  court  finds  a  sub- 
stantial error  in  the  rulings  or  instructions  of  the  trial  judge,  or 
finds  the  verdict  unsupported  by  the  evidence,  it  may  reverse  the 
judgment  and  order  a  new  trial.   Otherwise  it  affirms  the  judgment. 


§9]  SCOPE  OF  THIS  WORK  9 

If  a  new  trial  is  ordered,  the  same  procedure  is  repeated,  except 
that  no  new  pleadings  are  necessary. 

When  a  final  judgment  is  entered,  the  successful  party  is  en- 
titled, besides  any  judgment  for  a  fixed  sum,  to  such  costs  as  may 
be  allowed  by  law.  If  the  judgment  is  not  paid,  he  may  issue  an 
execution  against  the  property  of  his  adversary,  and  the  sheriff 
may  levy  on  the  property  and  sell  it  to  satisfy  the  judgment.  In 
every  state  a  certain  amount  of  property  is  exempt  from  levy  and 
sale  upon  judgments.  These  exemption  laws  are  intended  to  secure 
to  debtors  certain  household  necessities,  tools  of  a  trade,  and  often 
a  homestead. 

9.  Scope  of  this  work.  A  business  man  has  to  deal  mainly  with 
property  and  contracts.  He  can  hardly  carry  on  business  without 
dealing  directly  or  indirectly  with  some  species  of  property,  and  very 
often  the  purchase  and  sale  of  property  is  the  chief  part  of  his 
business.  He  cannot  carry  on  business  at  all  without  making  con- 
tracts, —  often  scores  or  hundreds  of  contracts  in  a  single  day. 
Accordingly  these  two  topics  of  the  law  are  those  with  which  the 
business  man  should  be  especially  familiar.  He  needs  to  know 
what  constitutes  a  binding  contract,  what  obligations  arise  upon 
its  completion,  and  what  steps  are  necessary  to  its  legal  perform- 
ance. While  he  can  hardly  hope  to  know  technically  about  torts, 
he  ought,  if  an  employer  of  workmen,  to  know  what  obligations 
he  undertakes  as  concerns  their  safety,  and  what  liabilities  he 
incurs  by  failing  to  use  due  care  to  have  the  instrumentalities  of 
his  business  in  a  safe  condition.  It  will  be  the  object  of  this  work 
to  state  some  of  the  more  important  legal  rules  connected  with 
these  subjects. 

We  shall  first  consider  the  formation  of  contracts,  that  is,  what 
constitutes  a  binding  and  enforceable  agreement.  This  will  be 
followed  by  a  discussion  of  the  operation  of  contracts  (that  is,  the 
rights  arising  from  them)  and  the  discharge  of  contracts  (that  is, 
how  they  are  ended  and  the  rights  under  them  terminated). 

These  general  principles  will  be  followed  by  a  discussion  of  the 
particular  contracts  concerning  personal  property  (namely,  the  sale, 
bailment,  carriage,  and  insurance  of  goods)  and  the  particular  con- 
tracts concerning  credit  (that  is,  contracts  creating  debts,  contracts 
guaranty,  and  contracts  contained  in  commercial  paper). 


lO  PRELIMINARY  TOPICS  [Ch.  I 

Agency,  the  means  by  which  one  makes  contracts  through  an 
employee,  follows  the  discussion  of  contracts  and  their  special 
forms.  Here  also  is  an  excursus  upon  the  subject  of  master 
and  servant. 

Business  associations,  such  as  partnerships  and  corporations, 
are  next  discussed. 

Finally,  there  is  a  concise  treatment  of  the  subject  of  property, 
real  and  personal,  in  order  to  bring  together  some  topics  not 
treated  under  the  head  of  contract. 

REVIEW  QUESTIONS 

Section  1.  With  what  is  business  concerned.?  What  is  included  in  the 
term  "  business  "  ?  Enumerate  all  the  different  kinds  of  business  conducted  on 
a  specified  block  of  a  business  street  in  your  city  or  village. 

2.  Define  law  ;  common  law  ;  statute  law.  Who  declares  the  common  law  ? 
Where  is  it  found.?  What  is  it  based  upon.?  What  is  the  force  of  precedents? 
What  are  the  two  objects  of  statute  law  ?  Why  is  the  law  more  difficult  to 
state  in  America  than  in  England? 

3.  Explain  "  business  law."  From  what  branch  of  the  law  is  it  mainly 
taken? 

4.  Name  two  main  divisions  of  the  law.  What  does  public  law  include? 
What  does  private  law  include  ? 

5.  What  is  property  ?  What  objects  and  rights  constitute  property  ?  What 
is  real  property?  Is  an  estate  for  years  real  property?  Is  a  mortgage?  What 
two  kinds  of  personal  property?  What  three  kinds  of  personal  chattels? 
With  what  two  kinds  of  property  is  business  chiefly  concerned  ? 

6.  What  are  legal  obligations?  How  do  they  arise?  Distinguish  between 
contract  obligation  and  tort  obligation.  Illustrate.  Name  and  illustrate  some 
torts.  Explain  and  illustrate  quasi-contracts.  Explain  and  illustrate  trusts. 
Explain  the  meaning  of  the  term  "trust"  in  economic  discussions. 

7.  What  is  a  court?  a  trial  court?  an  appellate  court?  Describe  three 
kinds  of  trial  courts.  Name  the  federal  courts.  What  are  equity  courts?  Do 
they  have  a  jury?  What  is  equity?  What  are  admiralty  courts?  What  cases 
do  they  hear?    What  is  the  United  States  admiralty  court? 

8.  Describe  the  steps  in  bringing  a  case  before  a  court  and  to  trial  and 
judgment.  Explain  the  process  of  an  appeal.  How  is  a  judgment  enforced? 
What  are  exemptions? 


PART   I.    THE   PRINCIPLES   OF 
CONTRACT 

CHAPTER  II 

FORMATION  OF  CONTRACTS 

10.  Definition  of  contract.  A  contract  is  an  agreement  between 
two  or  more  persons  for  the  breach  of  which  a  court  of  law  will 
give  damages.  There  are  many  agreements  for  the  breaking  of 
which  no  damages  can  be  had,  either  because  the  agreement  con- 
templates no  legal  relations  or  because  it  ends  in  a  legal  relation 
that  is  enforceable  only  in  a  court  of  equity. 

Examples :  i.  B  agrees  to  sell  a  watch  to  C  for  $25,  and  C  agrees  to  pay 
B  S25  for  the  watch.  This  is  a  contract.  If  B  refuses  to  deliver  the  watch 
C  has  an  action  at  law  against  B  for  damages.  If  C  refuses  to  take  the  watch 
and  pay  the  $25,  B  has  an  action  at  law  against  C  for  damages. 

2.  D  and  E  mutually  agree  that  they  will  meet  each  other  at  a  designated 
place  and  go  to  a  football  game  together.  This  is  not  a  contract.  It  contem- 
plates social,  not  legal,  relations. 

3.  F  agrees  with  G  to  take  G's  "property  and  invest  it,  receive  the  income, 
pay  the  income  to  G  during  his  life,  and  divide  the  principal  among  G's  chil- 
dren after  G's  death.  This  creates  a  trust.  If  F  failed  to  pay  over  the  income, 
C]'s  remedy  would  be  by  suit  in  equity  for  an  accounting,  not  at  law  for 
damages.    Since  the  agreement  is  not  enforceable  at  law,  it  is  not  a  contract. 

The  agreement  may  give  one  party  the  right  to  demand  that 
the  other  do  something  (affirmative  contract),  or  it  may  give  one 
party  the  right  to  demand  that  the  other  forbear  from  doing 
something  (negative  contract),  or  the  same  agreement  may  give 
both  rights. 

Example  4.  B  sells  his  dry-goods  business  to  C  for  $5000,  and  agrees  not 
to  engage  in  that  business  again  in  the  same  city.  C  acquires  two  rights:  first, 
the  right  to  have  B  transfer  to  him  the  business;  and,  second,  the  right  to  have 
B  forbear  to  enter  into  competition  with  him.    For  the  breach  of  either  of 


II 


12  rORMATION  OF  CONTRACTS  [Cu.  II 

these  terms  C  lias  an  action  at  law  for  damages.  (For  the  breach  of  the  sec- 
ond he  might  also  secure  an  injunction  in  equity,  because  the  damages  he 
would  suffer  from  B's  competition  are  so  uncertain  that  the  legal  remedy  is 
deemed  inadequate  ;  but  since  he  may  have  damages  at  law,  the  agreement  is 
a  contract.    Equity  courts  sometimes  specifically  enforce  contracts.) 

The  persons  making  the  agreement  may  be  two  or  more,  but 
they  are  so  divided  as  to  'constitute  two  groups  of  persons. 

Example  5.  B  sells  his  horse  to  C  and  D.  C  and  D  resell  the  horse  to 
E,  F,  and  G.  In  the  first  contract  B  is  on  one  side  and  C  and  D  jointly  on 
the  other.  In  the  second  contract  C  and  D  are  on  one  side  and  E,  F,  and  G 
on  the  other. 

In  some  cases  three  parties  make  among  them  three  contracts, 
which  constitute  what  is  called  a  novation. 

Example  6.  A  owes  B  ?ioo.  B  owes  C  $100.  The  three  meet  and  agree 
that  A  shall  pay  C.  B's  claim  on  A  is  extinguished.  B's  obligation  to  C  is 
extinguished.  A  new  obligation  from  A  to  C  is  created.  Thus  there  are,  in 
effect,  three  contracts. 

11.  Essentials  of  enforceable  contract.  In  order  that  a  con- 
tract shall  be  enforceable,  that  is,  one  for  the  nonperformance  of 
which  the  law  will  give  damages,  the  following  elements  must  be 
present:  (i)  an  agreement,  (2)  by  competent  parties,  (3)  upon 
sufficient  consideration,  (4)  in  some  cases  evidenced  in  a  particu- 
lar form,  (5)  for  a  legal  object,  and  (6)  made  without  mistake, 
fraud,  undue  influence,  or  duress. 

I.    Agreement 

12.  Contracts  begin  in  agreement.  All  true  contracts  begin 
with  an  agreement.  By  agreement  is  meant  the  meeting  of  the 
minds  of  the  contracting  parties  in  a  common  assent  to  the  same 
definite  conclusion.  But  the  state  of  the  mind  of  a  party  must 
be  judged  by  what  he  says  and  does.  He  cannot  definitely  agree 
to  a  thing  and  afterwards  escape  upon  the  plea  that  he  misspoke 
himself  or  did  an  act  manifesting  agreement  which  he  did  not 
intend  to  do. 

Examples  .•  i .  B  leads  out  a  colt  and  says  to  C,  "  I  will  sell  you  this  colt 
for  S40."  C  answers,  "  I  will  take  him  at  that  price."  B  discovers  he  has  led 
out  a  colt  he  did  not  intend  to  sell.    B  is  bound. 


§§13,14]  AGREEMENT  13 

2.  B  writes.  "I  vaW  sell  you  10.000  bushels  of  wheat  at  80  cents  a  bushel."' 
C,  in  honest  reliance  upon  the  offer,  replies,  "  I  will  accept  your  offer."  B 
asserts  he  intended  to  write,  and  thought  he  had  written,  "  i.ooo  bushels."' 
B  is  bound  to  deliver  10.000  bushels  or  pay  damages  for  nondelivery. 

Agreements  must  be  definite  enough  to  enable  a  court  to  ascer- 
tain and  enforce  the  terms.  Indefinite  and  uncertain  agreements 
are  unenforceable,  because  the  court  will  not  make  or  complete 
'contracts  for  parties. 

Exa7)iples :  3.  "I  will  sell  you  one  hundred  acres  of  land  for  Srooo." 
"  I  accept."  This  is  too  uncertain,  because  no  definite  one  hundred  acres 
are  indicated. 

4.  "  I  will  sell  you  one  hundred  bushels  of  potatoes  for  $60."  "  I  accept." 
This  is  definite  enough,  because  no  particular  one  hundred  bushels  need  be 
specified. 

5.  "  I  will  give  as  much  for  your  horse  as  A  says  he  is  worth."  "  I 
accept."'  This  is  definite  enough,  because  a  way  of  ascertaining  the  price 
has  been  agreed  upon. 

6.  "  Send  me  one  hundred  bushels  of  potatoes."'  The  potatoes  are  delivered. 
This  is  enough.    The  market  price  is  understood. 

13.  Classes  of  agreements.  Agreements  leading  to  legal  obliga- 
tions serve  three  purposes  ;  namely,  to  create  rights,  to  transfer 
rights,  and  to  extinguish  rights.  An  agreement  which  creates  a 
right  is  called  a  contract.  An  agreement  which  transfers  a  right 
is  called  an  assignment.  An  agreement  which  extinguishes  a 
right  is  called  a  release  or  discharge.    All  are  in  fact  contracts. 

Examples :  \.  A  and  B  agree  that  A  shall  sell  and  deliver  his  horse  to 
B  for  $100,  which  B  agrees  to  pay  sixty  days  after  such  delivery.  This  is  a 
contract.  When  A  delivers  the  horse,  he  has  performed  his  part  and  has  a 
right  against  B  to  demand  the  Si 00  in  sixty  days. 

2.  A  agrees  with  C  to  transfer  to  C  this  right  against  B  in  exchange  for 
a  cow.  When  done  this  is  an  assignment  by  A  to  C  of  A's  right  against  B 
to  the  $100. 

3.  C,  who  now  owns  the  right  against  B,  agrees  with  B  to  accept  and  does 
accept  a  buggy  as  the  equivalent  of  the  $100.  C  thereby  discharges  the  right 
against  B. 

14.  Agreements  originate  in  some  form  of  offer  and  acceptance. 
An  offer  is  an  expression  by  one  ];erson  of  his  willingness  to 
become  a  party  to  an  agreement  in  accordance  with  terms  ex- 
pressed or  indicated.  Acceptance  is  the  expression  by  the  person 
to  whom  the  offer  was  made  of  his  willingness  to  do  or  forbear 
from  doing  what  the  offeror  requires. 


14  FORMATION  OF  CONTRACTS  [c'li.  II 

The  offer  may  be  of  a  promise  or  of  an  act.  The  acceptance 
may  be  the  giving  of  a  promise  or  the  doing  of  an  act.  No 
words  need  be  used.  We  may  have  a  contract  in  which  there 
is  a  promise  for  a  promise,  that  is,  an  outstanding  promise  on 
each  side ;  this  is  called  a  bilateral  executory  contract.  Or  we 
may  have  a  contract  in  which  there  is  a  promise  outstanding 
on  one  side  and  the  act  performed  on  the  other ;  this  is  called 
a  unilateral  executory  contract.  When  both  parties  have  fully 
performed  the  contract,  it  is  said  to  be  an  executed  contract. 
When  a  promise  is  put  into  words,  it  is  said  to  be  an  express 
promise ;  when  it  is  inferred  from  acts  or  conduct,  it  is  called 
an  implied  promise. 

Examples :  i.  Promise  for  promise:  "  I  will  work  for  you  for  one  month 
for  $30."  "  Agreed."  There  is  an  outstanding  promise  on  each  side  before 
any  act  is  done. 

2.  Promise  for  act:  "  I  will  pay  you  $10  if  you  find  and  return  my  lost 
watch."  The  offeree  finds  and  returns  the  watch.  The  contract  is  then  com- 
plete.   There  is  an  outstanding  promise  on  one  side. 

3.  Act  for  promise  :  A  newspaper  is  sent  regularly  to  a  person  who  takes 
and  reads  it  as  often  as  it  reaches  him.  The  offer  is  in  the  sending  of  the 
paper.    The  promise  to  pay  for  it  is  implied  from  the  receiving  and  using  it. 

There  are  certain  rules  governing  offer  and  acceptance  that 
are  often  applied  in  order  to  determine  whether  an  agreement 
has  been  reached.    These  will  be  briefly  enumerated. 

1.  TJie  offer  imtst  be  eommiinicated  to  the  offeree.  This,  as  we 
have  seen,  may  be  by  oral  or  written  words  or  by  acts  and  con- 
duct. However  expressed,  the  offer  must  actually  reach  the  offeree 
or  there  can  be  no  acceptance  by  him.  The  offer  may  be  made 
to  all  the  world  but  must  be  accepted  by  some  definite  person. 

Example  4.  B  publishes  in  a  newspaper  an  offer  of  %\o  reward  for  the 
return  of  his  lost  watch.  C  returns  the  watch,  not  knowing  that  such  a  reward 
has  been  offered.  Afterwards  C  learns  of  the  offer  and  claims  the  reward.  He 
cannot  compel  B  to  pay  it,  because  the  act  was  not  done  relying  upon  the  offer 
or  with  knowledge  of  it.  (But  some  states  allow  a  recovery  upon  no  very  well- 
defined  principle.) 

2.  The  acceptance  must  be  either  communicated  or  else  actively 
tnanifcsted  iti  a  mawier  contemplated  by  the  terms  of  the  offer. 
Mental  determination  to  accept  is  not  enough  ;  the  mental  intent 
must  be  unequivocally  indicated.    If  the  offeror  has  stated  how  it 


§14]  AGREEMENT  15 

shall  be  indicated,  the  offeree  may  do  what  is  required  without 
actually  communicating  with  the  offeror ;  but  stipulating  that 
silence  shall  be  deemed  an  acceptance  will  not  make  it  so,  since 
the  offeror  cannot  impose  on  the  offeree  the  obligation  to  speak. 
Speech  or  action  is  necessary.  When  an  offer  is  sent  by  mail, 
it  is  implied  that  the  offeree  may  indicate  assent  by  mailing  an 
acceptance ;  and  the  contract  is  complete "  when  the  letter  is 
mailed,  although  it  may  never  be  received. 

Exatnples :  5.  B  writes  C:  "I  will  give  you  $100  for  your  horse.  If 
within  ten  days  I  do  not  hear  from  you  to  the  contrary,  I  shall  consider  that 
you  accept."  No  answer  is  returned  to  B.  There  is  no  contract,  even  though 
C  has  mentally  determined  to  accept.  Mere  silence  does  not  give  consent.  If 
B  had  specified  some  act  that  C  was  to  do  to  indicate  assent,  the  doing  of  the 
act  with  the  intent  to  accept  would  be  enough. 

6.  D  advertises  that  if  anyone  buys  and  uses  his  medical  remedy  as 
directed  and  afterwards  contracts  any  disease  caused  by  taking  cold,  he  will 
pay  to  such  person  $100.  E  buys  and  uses  the  medicine  as  directed  and  after- 
wards contracts  a  cold  and  disease  caused  by  the  cold.  D  is  held  liable  to  pay 
E  the  $100.  E's  acceptance  of  D's  offer  is  manifested  by  buying  and  using 
the  medicine  as  directed,  with  knowledge  of  the  offer.  It  is  not  necessary  for 
E  to  communicate  his  acceptance  to  D. 

7.  F  posts  a  letter  to  G,  offering  to  sell  his  horse  to  G  for  $1  50.  G  receives 
the  letter  on  Monday,  and  on  Tuesday  posts  a  letter  directed  to  F,  accepting 
the  offer.  The  letter  is  lost  in  the  mails  and  never  reaches  F,  who  on  Friday 
sells  his  horse  to  H.  F  is  liable  to  G  in  damages  for  breach  of  contract,  for 
the  contract  was  completed  by  acceptance  as  soon  as  G  posted  his  reply.  If  F 
wishes  to  guard  against  this,  he  should  say  in  his  letter,  "  Upon  receiving  your 
acceptance  the  sale  will  be  closed,"  or  use  some  similar  phrase  especially 
requiring  that  the  acceptance  should  be  actually  received.  By  using  the  mails 
the  offeror  impliedly  invites  the  offeree  to  use  the  mails,  with  the  result  indi- 
cated. If  F's  offer  were  personal,  there  would  ordinarily  be  no  implied  invita- 
tion to  use  the  mails  for  an  acceptance  ;  but  there  might  be  an  invitation  either 
expressed  or  gathered  from  circumstances,  as,  if  G  lives  at  a  distance  and  is 
told  by  F  to  go  home,  think  it  over,  and  let  him  know,  G  may  use  the  mails, 
and  his  acceptance  is  complete  when  the  letter  containing  it  is  duly  posted. 

3.  The  acceptance  must  be  absolute  and  accord  with  the  terms 
of  the  offer.  If  the  offeree  qualifies  his  acceptance  in  any  way,  it 
is  not  an  acceptance  but  merely  a  counter  offer  to  be  accepted  or 
rejected  by  the  original  offeror.  A  qualified  acceptance  amounts 
to  a  rejection  of  the  offer,  whicli  cannot  thereafter  be  accepted 
so  as  to  bind  the  offeror. 


l6  FORMATION  OF  CONTRACTS  [On.  II 

Exatttple  8.  B  offers  liis  horse  to  C  for  #  i  50.  C  replies,  "  I  will  take  the 
horse  at  5i  25."  B  refuses.  C  then  says,  "  I  will  take  him  at  $1  50."  B  refuses 
this.  C  sues  H  for  breach  of  contract.  C  will  fail.  C's  acceptance  at  $125  was 
a  rejection  of  the  offer  at  51  50,  and  the  offer  was  at  an  end. 

4.  A)i  offer  may  be  varied  or  revoked  before  acceptance.  An 
unaccepted  offer  creates  rfo  legal  rights.  The  offeror  may  vary 
or  revoke  it  at  any  time  before  the  offeree  accepts  it.  If,  how- 
ever, the  offeree  has  paid  a  consideration  for  the  option  to  accept 
or  reject,  or  if,  in  some  states,  the  offer  is  under  seal,  the  offer 
is  in  the  form  of  a  contract  and  cannot  be  varied  or  revoked. 
An  acceptance  of  the  offer  concludes  the  contract  and  it  is  then 
irrevocable.  But  there  must  in  fact  be  an  offer.  Merely  sending 
out  a  circular  of  prices,  or  advertising  prices  in  a  newspaper,  is 
not  an  offer,  but  merely  an  invitation  to  deal  with  the  advertiser. 

Examples :  9.  B  offers  C  his  horse  for  $  1 50  and  gives  C  twenty-four 
hours  in  which  to  accept.  In  an  hour  B  withdraws  his  offer;  but  C,  an  hour 
later,  accepts.  There  is  no  contract.  There  was  nt)  consideration  for  B's 
promise  to  give  C  twenty-^ur  hours  to  accept,  and  B  may  revoke  his  offer 
before  C  actually  accepts. 

10.  D  gives  E  an  option  to  take  1000  bushels  of  wheat  on  September  i, 
at  90  cents  a  bushel,  for  which  option  E  pays  D  $40.  D  withdraws  the  option 
before  September  i ,  but  on  that  day  E  accepts  and  demands  the  wheat.  D  is 
liable  to  E  for  refusal  to  deliver.    The  offer  is  irrevocable. 

5.  The  offeree  must  have  notice  of  the  revocation.  An  offeree 
may  accept  within  the  time  fixed,  or,  if  none  be  fixed,  within  a 
reasonable  time,  unless  he  has  notice  before  his  acceptance  that 
the  offer  is  revoked.  It  seems  that  the  notice  need  not  neces- 
sarily come  from  the  offeror,  it  being  sufficient  that  the  offeree 
actually  learns  from  any  source  that  the  offer  is  revoked. 

Examples:  11.  B  writes  C,  "I  will  sell  you  my  horse  for  $150."  The 
next  day  B  writes  C,  "  I  withdraw  the  offer."  The  following  day,  and  before 
receiving  the  letter  containing  the  withdrawal,  C  posts  an  acceptance.  The 
contract  is  complete,  since  C  had  no  notice  of  the  withdrawal  before  acceptance, 
and  acceptance  is  complete  when  the  letter  is  mailed.  Revocation  is  not 
complete  until  received. 

12.  D  offers  E  his  horse  at  $150  and  gives  E  two  days  to  accept.  The 
next  day  D  sells  the  horse  to  X,  who  tells  E  the  horse  is  his  (X's).  E  then 
accepts.  There  is  no  contract.  E  knew  when  he  accepted  that  the  offer  had 
been  revoked  by  a  sale  to  X. 


§15]  PARTIES  17 

6.  Aji  offer  may  lapse  witJioict  express  revocatiofi.  If  a  time  is 
fixed,  the  expiration  of  the  time  revokes  the  offer.  If  no  time 
is  fixed,  the  offer  lapses  after  the  expiration  of  a  reasonable  time ; 
what  is  a  reasonable  time  must  depend  upon  the  circumstances  of- 
the  case.    An  offer  lapses  by  the  death  of  either  party. 

Examples :  13.  On  June  i  B  offers  C  $50  for  a  cow.  C  accepts  the  offer 
on  August  I.  This  is  not  a  reasonable  time  where  the  parties  live  near  each 
other.    Even  a  week  might  be  too  long. 

14.  D  writes  E,  "  I  will  sell  you  my  farm  for  $3000."  Before  E  posts  his 
acceptance  D  dies.  The  offer  is  revoked  by  D's  death.  But  if  E  posts  his 
acceptance  before  D's  death  the  contract  is  binding  upon  D's  estate. 

II.    Competent  Parties 

15.  Infants.  An  infant  is  a  person  under  the  age  of  twenty- 
one.  In  many  states  women  become  of  age  at  eighteen,  and  in 
some  they  are  of  age  at  eighteen,  or  even  younger,  if  married. 

A  person  attains  his  majority  on  the  dgy  preceding  his  twenty- 
first  birthday,  that  is,  on  the  last  day  of  his  twenty-first  year. 
If  the  twenty-first  anniversary  of  one's  birthday  is  November  8, 
he  can  vote  or  make  binding  contracts  on  November  7. 

Contracts  made  during  infancy  are  voidable  ^  at  the  infant's 
option,  exercised  either  during  his  infancy  or  after  he  attains  his 
majority,  subject  to  these  exceptions  :  {a)  contracts  for  necessaries 
are  binding ;  {b)  contracts  made  during  infancy  but  ratified  after 
attaining  majority  are  binding.  But  an  infant's  contracts  are  bind- 
ing upon  the  adult  with  whom  they  are  made  ;  the  infant  alone 
can  repudiate  them  at  his  election. 

{a)  Necessaries  include  not  merely  the  things  necessary  to  sus- 
tain life,  but  also  such  additional  articles  as  are  suitable  to  the  infant's 
.station  in  life  and  to  his  circumstances  when  they  are  purchased. 
In  addition  to  food,  lodging,  clothing,  medical  attendance,  and 
schooling,  such  articles  as  horses,  watches,  and  jewelry  have  been 
held  to  be  necessaries  under  particular  circumstances  ;  but  the 
courts  are  not  disposed  to  go  beyond  the  normal  list  of  neccs.saries. 
Even  as  to  tho.se  the  person  who  furnishes  them  cannot  recover 

'  It  is  often  said  that  an  infant's  appointment  of  an  agent  is  void,  —  that  is, 
absolutely  of  no  effect,  —  but  this  is  so  doubtful  that  the  statement  is  not  made 
in  the  text  (see  sect.  W]  poil). 


iS  FORMA'I'ION   OF  CONTRACTS  [in.  11 

if  the  infant  was  already  adequately  supplied.  If  one  can  recover 
against  an  infant  for  necessaries,  he  can  recover  only  the  reason- 
able value,  not  what  the  infant  may  have  agreed  to  jxiy. 

(/;)  Ratification  takes  place  when,  upon  allainin<;-  his  majority, 
the  infant  promises  to  pay  or  does  an  act  which  is  a  clear  recog- 
nition of  his  liability.  Some  states  require  a  ratification  to  be  in 
writing,  but  this  is  not  generally  so. 

Examples:  i.  B,  an  infant,  agrees  to  work  for  C  for  a  year  at  $12  a 
month.  He  works  a  month  and  then  quits.  C  has  no  action  against  IJ  for 
breach  of  contract.    B  may  recover  against  C  for  the  labor  performed. 

2.  Same  contract.  At  the  end  of  a  month  C  discharges  B  without  cause. 
B  has  an  action  against  C  for  breach  of  contract.  The  adult  is  bound  but  the 
infant  is  not. 

3.  D,  an  infant,  purchases  jewelry  of  E.  \L  cannot  recover  the  price  from 
D,  although  if  D  pleads  his  infancy  as  a  defense  to  the  action,  the  title  to  the 
jewelry  will  revest  in  E.  It  is  immaterial  that  E  thought  D  was  an  adult.  It 
is  immaterial  that  D  represented  that  he  was  of  age,  although  D  might  in  such 
a  case  be  liable  in  tort  for  deceit. 

4.  D  purchases  clothing  for  himself  of  E.  D  is  liable,  provided  E  can 
show  that  D  was  not  adequately  supplied  according  to  his  station  in  life.  But 
although  D  promised  to  pay  ^50  for  the  clothing,  E  can  recover  only  its  actual 
value  up  to  $50. 

5.  E,  an  infant,  purchases  jewelry,  not  necessaries,  of  F.  After  attaining 
his  majority  E  promises  to  pay  for  the  jewelry.  E  is  now  liable  upon  the 
theory  of  ratification. 

6.  G,  an  infant,  purchases  a  horse  of  H  and  pays  for  it.  G  may  return  the 
horse  during  infancy  or  within  a  reasonable  time  after  attaining  his  majority 
and  recover  the  money.    This  is  disaffirmance,  the  opposite  of  ratification. 

7.  Same  purchase.  The  horse  dies.  G  may  recover  his  money  from  H. 
When  an  infant  disaffirms,  the  adult  may  recover  what  he  parted  with,  if  the 
infant  still  has  it ;  but  if  it  is  lost  or  destroyed,  the  adult  is  nevertheless  bound 
to  return  to  the  infant  whatever  he  received  from  him. 

16.  Insane  persons.  If  one  contracts  with  an  insane  person, 
knowing  him  to  be  insane,  the  contract  is  voidable  by  the  lunatic. 
If  one  contracts  with  a  person  who  is  insane  and  who  has  been 
judicially  declared  to  be  so  by  some  competent  judge  or  other 
officer/  the  contract  is  probably  voidable  by  the  lunatic.    If  one 

1  Statutes  provide  methods  by  which  persons  suspected  of  insanity  rnay  be 
brought  before  a  court  and  the  matter  judicially  determined.  A  judgment  of 
insanity  is  constructive  notice  to  all  the  world  of  the  fact  of  insanity.  The  insane 
person's  property  is  then  under  the  control  of  a  guardian  or  committee  appointed 
by  the  court. 


§§17.  IS]  CONSIDERATION  19 

contracts  in  good  faith  with  a  person  not  known  to  be  insane 
but  who  is  so  in  fact,  the  contract  may  be  upheld  if  it  is  so  far 
executed  that  to  avoid  it  would  damage  the  innocent  party ;  if, 
however,  it  can  be  avoided  and  the  innocent  party  be  put  in  staUi 
quo,  the  lunatic  may  avoid  it  even  in  this  case. 

An  insane  person  is,  like  an  infant,  liable  for  necessaries.  If 
he  afterwards  recovers  his  reason,  he  may  ratify  contracts  made 
while  insane. 

Idiots'  contracts  stand  substantially  upon  the  same  footing  as 
the  contracts  of  insane  persons. 

An  intoxicated  person,  if  so  much  intoxicated  as  to  be  unable 
to  understand  and  appreciate  the  nature  of  his  acts,  may  avoid  a 
contract  made  w^hile  in  such  a  condition. 

17.  Married  women.  At  common  law  married  women  were 
incapable  of  making  any  binding  contracts.  Neither  the  married 
woman  nor  the  other  party  to  the  contract  was  bound  ;  the  con- 
tract was  absolutely  void.  She  could  bind  her  husband,  not  herself, 
upon  a  contract  for  necessaries. 

This  common-law  disability  has  been  largely  removed  by  stat- 
utes. These  vary  in  the  different  states,  but  in  general  a  married 
woman  may  now  contract  as  fully  as  an  unmarried  woman,  except 
that  a  married  woman  cannot,  in  some  states,  contract  with  her 
husband  or  as  surety  for  her  husband.  These  statutes  are  too 
numerous  to  be  considered  further. 

III.     CoXSinERATION 

18.  Necessity  of  consideration.  Save  in  the  case  of  sealed 
contracts  (and  now  in  many  states  even  as  to  these),  every 
promise  contained  in  a  contract  must  rest  upon  a  consideration 
in  order  to  be  enforceable.  A  contract  not  under  seal  is  called 
a  simple  contract.  A  sealed  contract  is  sometimes  called  a 
deed  or  a  specialty  ;  if  for  the  payment  of  money,  it  is  often 
called  a  bond. 

Consideration  consists  in  some  legal  detriment  suffered  by  the 
promisee's  relying  upon  the  promise,  and  there  is  usually  some 
corresponding  benefit  to  the  promisor.  Unless  such  consideration 
can  be  shown   by  the  jjromisee,   he  cannot  enforce  the   promise 


20  FORMA  riON  OK  CONTRACTS  [rn.  II 

against  the  promisor.  Hence  gratuitous  promises  are  unenforce- 
able. A  mere  moral  obligation  to  do  a  thing  is  not  a  consideration 
for  a  promise  to  do  it. 

In  negotiable  instruments  the  law  presumes  consideration,  but 
the  promisor  may  show  that  none  in  fact  exists. 

At  common  law  scaled  instruments  require  no  consideration. 
Many  states  by  statute  now  provide  that  in  sealed  instruments 
tliere  must  be  a  consideration,  but  make  the  seal  presumptive 
evidence  that  there  is  one,  leaving  the  promisor  to  show,  if  he 
can,  that  there  was  none.  In  other  states  the  distinction  between 
sealed  and  unsealed  instruments  has  been  abolished. 

Examples  .•  i .  A  father  makes  and  presents  to  his  son  a  negotiable  promis- 
sory note  as  a  gift.  The  son  cannot  enforce  it  if  the  father  sets  up  want  of 
consideration  as  a  defense. 

2.  The  son  negotiates  the  note  before  maturity  to  X,  who  pays  the  son  for 
it  in  good  faith.  X  may  enforce  it  against  the  father  because  X  has  suffered 
a  legal  detriment  in  parting  with  his  money,  relying  upon  the  father's  promise 
(see  sect.  \o\  post). 

3.  A  father  says  to  his  son,  "  I  will  give  you  $500  if  you  refrain  from  smok- 
ing until  you  are  twenty-one."  The  son  refrains.  He  may  enforce  the  promise. 
He  has  suffered  a  legal  detriment  in  doing  what  he  was  not  legally  bound  to  do. 

4.  B  promises  C  that  he  will  repair  C's  watch  free  of  charge.  He  after- 
wards refuses  to  do  so.  C  has  no  remedy.  There  is  no  consideration  for 
B's  promise. 

5.  Same  promise.  B  undertakes  the  repairs  and  does  them  so  badly  as 
to  ruin  the  watch.  B  is  liable  to  C  for  gross  negligence.  C  suffers  a  legal 
detriment  in  parting  with  his  watch. 

19.  The  consideration  need  not  equal  the  promise  in  value. 

The  law  allows  persons  to  affix  their  own  value  to  acts  or  for- 
bearances. If  the  promisee  does  or  forbears  anything  he  is  not 
bound  to  do  or  forbear,  there  is  sufficient  consideration.  But  if 
the  promisee  does  or  forbears  something  he  is  already  bound  to 
do  or  forbear,  there  is  no  consideration.  The  problem  in  many 
cases  is  whether  the  promisee  has  done  or  forborne  what  he  was 
not  under  a  legal  obligation  to  do  or  forbear.  Such  cases  will  be 
considered  in  concrete  examples. 

Examples :  i .  John  Doe  promises  Richard  Roe  that  if  Roe  will  name 
his  child  after  John  Doe,  the  latter  will  pay  Roe  (or  the  child)  #1000.  Roe 
names  the  child  after  Doe.  He  may  recover  the  $1000.  He  has  done  what 
he  was  not  legally  bound  to  do. 


§20]  CONSIDERATION  21 

2.  B  agrees  to  pay  C  $200  for  a  buggy  worth  but  $50.  C  agrees  to  deliver 
the  buggy  to  B  for  S200.  C  may  recover  the  §200.  C  makes  a  promise  which 
he  is  not  bound  to  make,  and  which  B  may  enforce  against  him,  and  this  is  a 
consideration  for  B's  promise. 

3.  F  has  a  horse  belonging  to  E  which  he  wrongfully  refuses  to  deliver 
up.  E  promises  F  $50  if  he  will  deliver  it,  and  F  does  deliver  it.  F  cannot 
recover  the  $50.    He  has  merely  done  what  he  was  legally  bound  to  do. 

4  (Successive  pro7nises).  G  contracts  to  dig  a  well  for  H  for  $60.  When 
down  a  few  feet,  G  strikes  rock  and  refuses  to  go  on.  H  promises  G  an 
extra  S25  if  he  will  finish  the  well,  {a)  Some  courts  say  G  cannot  recover 
the  extra  $25  because  he  merely  did  what  he  was  already  bound  to  do. 
(b)  Some  courts  say  G  was  not  bound  to  go  on  because  he  had  an  option  to 
stop  and  pay  damage?  for  the  breach  of  contract,  and  that  G  therefore 
did  what  he  could  not  be  legally  compelled  to  do.  (c)  Some  courts  say  that 
the  old  contract  was  by  agreement  rescinded  and  a  new  one  for  $85  was 
made.  This  case  illustrates  how  conflicts  of  judicial  decisions  grow  up  where, 
as  in  our  country,  we  have  so  many  courts  independent  of  each  other. 

5  {Payment  of  smaller  sum).  K  owes  L  $100.  L  says,  "  If  you  will  pay 
me  $60,  I  will  release  the  other  $40."  K  pays  the  $60.  L  may  also  recover 
the  other  %\o.  The  payment  of  a  smaller  sum  in  satisfaction  of  a  larger  is 
not  a  sufficient  consideration  to  support  a  promise  to  release  the  balance, 
because  K  is  already  legally  bound  to  pay  the  $60.  But  if,  by  agreement,  K 
also  gives  L  a  jackknife,  he  has  done  what  he  was  not  legally  bound  to  do, 
and  the  $40  claim  is  discharged. 

6  (Composition  with  creditors).  M  owes  various  creditors,  A,  B,  C,  and 
others.  ,  M  agrees  to  pay  each  60  per  cent  of  his  claim,  provided  he  and  all 
others  will  release  M  from  the  balance ;  they  all  agree  to  do  this.  M  pays  each 
60  per  cent.  A  after^vards  sues  M  for  the  remaining  40  per  cent  of  his  claim. 
A  cannot  recover.  This  is  called  a  composition  with  creditors.  The  reasons 
given  for  upholding  it  are  not  consistent,  but  it  is  often  said  to  be  an  exception 
based  upon  the  policy  of  encouraging  such  compositions  and  upon  the  policy 
of  forbidding  one  creditor  to  recover  more  when  by  a  kind  of  mutual  arrange- 
ment all  have  consented  to  take  the  same  percentage. 

7  (Mutual  subscriptions).  The  X  church  is  laising  money  for  a  new  bell. 
A,  B,  and  C  subscribe  each  the  sum  set  opposite  his  name.  May  these 
promises  be  enforced.?  Is  there  any  consideration  for  them.''  (a)  Some  courts 
say  there  is  none  unless  the  X  church  has  acted  upon  the  promises  by  pur- 
chasing a  bell  or  contracting  for  one.  (/')  Other  courts  think  the  promises 
mutually  support  each  other,  and  that  B  subscribes  in  consideration  of  A's 
subscription,  etc.  (c)  Other  courts  think  the  X  church,  by  accepting  the 
promises,  agrees  to  execute  the  plan,  and  that  this  promise  is  the  considera- 
tion for  the  promises  of  the  subscribers.  Here,  again,  we  have  a  conflict  of 
authority  upon  a  difficult  r|uestion  of  law. 

20.  A  past  consideration  will  not  support  a  promise.  A  p^st 
consideration  is  one  performed  or  finished  by  13  vvilhout  request 


22  FORMATION  OF  CONTRACTS  [Ch.  II 

and  before  any  promise  is  given  by  C.  If  C  should  afterwards 
promise  something  to  B  by  way  of  compensation  or  reward  for 
the  benefit  conferred  by  B's  act,  this  promise  would  rest  upon  a 
past  consideration  and  would  be  unenforceable. 

Examples :  i.  15  without  C's  knowledge  or  request  moves  a  stack  of  hay 
standing  on  C's  farm,  in  order  to  save  it  from  a  spreading  fire.  When  C 
learns  of  this,  he  promises  to  pay  B  for  his  time  and  trouble.  This  promise 
is  unenforceable  because  it  rests  upon  a  past  consideration. 

2.  D  finds  a  lost  article  and  returns  it  to  C,  the  owner.  C  promises  to  pay 
D  a  certain  sum  by  way  of  reward.  D  cannot  recover  upon  this  promise ;  it 
rests  upon  a  past  consideration. 

To  this  rule  there  are  certain  apparent  exceptions. 

a.  If  there  is  a  request  by  C  that  B  move  the  stack  or  that  D 
search  for  the  lost  article,  the  law  implies  a  promise  to  pay  for 
the  ser\'ice  ;  and  when  C  expressly  promises  to  pay,  he  is  merely 
confirming  the  implied  promise,  and  his  expressed  promise  is 
substituted  for  the  implied  one  and  is  enforceable. 

b.  If  there  is  some  legal  bar  to  enforcing  a  contract  against  C, 
which  he  may  set  up  or  not,  he  may  under  certain  circumstances, 
by  a  subsequent  promise,  render  himself  liable  on  such  a  contract 
notwithstanding  the  bar.  Such  legal  bars  are  infancy,  the  Statute 
of  Limitations,  discharge  in  bankruptcy,  and  the  like. 

Examples :  3.  B,  an  infant,  purchases  jewels  of  C.  When  B  arrives  at 
his  majority  he  promises  to  pay  for  them.  B  is  liable  to  C.  Some  say  B's 
promise  rests  upon  the  past  consideration,  that  is,  the  delivery  of  the  jewels, 
and  that  C  suffers  no  detriment  from  relying  upon  the  new  promise.  Others 
treat  B's  promise  merely  as  a  waiver  of  his  plea  of  infancy,  and  thus  escape 
the  difficulties  of  consideration. 

4.  D  owes  E  a  debt  which  is  barred  by  the  Statute  of  Limitations,  that  is, 
a  statute  providing  that  an  action  for  debt  or  breach  of  contract  must  be 
begun  within  a  certain  time  (usually  six  years).  If  E  sues  D,  the  latter  may 
plead  the  statute  and  escape.  But  after  the  debt  is  barred,  D  promises  to  pay 
it.    D  is  now  liable.    The  case  is  practically  the  same  as  that  of  the  infant. 

5.  F  owes  G  a  sum  of  money.  Without  any  new  consideration,  F  gives  G 
a  chattel  mortage  or  other  security.  The  chattel  mortgage  is  enforceable.  The 
antecedent  debt,  although  a  past  consideration,  is  sufficient  to  support  it. 

21.  The  consideration  must  be  legal.  Illegal  contracts  will  be 
dealt  with  later.  It  is  enough  to  say  here  that  if  A's  promise 
rests  upon  a  counter  promise  or  an  act  of  B's  which  is  illegal, 
then  A's  promise  cannot  be  enforced.    Thus,  A  promises  to  pay  B 


§22]  FORM  23 

a  sum  of  money  if  B  will  purloin  a  document  from  C.  B  purloins 
the  document.  He  cannot  recover  the  sum  promised,  because  his 
act  constituting  the  consideration  is  illegal.  So  also  promises  to 
pay  money  lost  in  gambling  are  unenforceable  because  all  gambling 
or  wagering  contracts  are  illegal. 


IV.    Form  :   W'ritixc.  ;   Seal 

22.  Statute  of  Frauds.  The  Statute  of  Frauds  (so  called  be- 
cause it  was  intended  to  prevent  fraud  and  perjury  in  the  proving 
of  contracts  before  the  courts)  was  enacted  by  the  English  Parlia- 
ment in  1676  and  has  been  substantially  reenacted,  in  whole  or  in 
part,  by  most  of  the  American  states.  Two  sections  of  this  statute, 
the  fourth  and  the  seventeenth,  are  those  that  deal  particularly 
with  contracts. 

I.  Fojirth  section.  The  fourth  section  provides  in  substance 
that  in  order  to  be  enforceable  the  following  contracts,  or  some 
note  or  memorandum  of  them,  shall  be  in  writing  and  signed  by 
the  party  to  be  charged  (that  is,  the  one  against  whom  it  is  sought 
to  enforce  the  contract)  or  by  his  authorized  agent : 

a.  the  promise  of  an  executor  or  administrator  to  pay  out 
of  his  own  estate  that  which  is  due  from  the  estate  he  is 
administering ; 

'  b.  the  promise  to  answer  for  the  debt,  default,  or  miscarriage 
of  another  —  that  is,  to  be  surety  that  another  will  pay  his  debts 
or  discharge  any  of  his  legal  obligations  (see  Chapter  VIII)  ; 

c.  the  promise  to  do  anything,  as  transfer  property,  in  con- 
sideration of  marriage,  that  is,  where  the  marriage  is  the  con- 
sideration for  such  promise  ; 

d.  any  contract  or  sale  of  lands,  or  any  interest  in  or  concern- 
ing lands  (though  in  the  United  States  generally  leases  for  less 
than  one  year  are  excepted)  ; 

e.  any  contract  which  by  its  terms  is  not  to  be  performed 
within  the  space  of  one  year  from  the  time  of  the  making  thereof  ; 
but  if  it  may  be  fully  performed  within  one  year,  it  docs  not 
require  a  writing. 

It  must  be  observed  that  this  rf(|uireniont  is  in  addition  to 
all  other  requirements.     All  contracts  rccjuirc  a  true  agreement, 


24  FORMATION  OF  CONTRACTS  [Ch.  II 

competent  parties,  and  consideration.  These  contracts  require  all 
those  things  and  also  a  writing  duly  signed.  Most  contracts 
may  be  proved  by  parol  evidence ;  these  contracts  may  be  proved 
only  by  a  writing.  The  writing  may  be  a  mere  memorandum 
stating  the  chief  points  in  the  agreement,  or  it  may  even  con- 
sist of  a  series  of  letters  so  connected  as  to  make  together  a 
complete  memorandum.  Careful  persons  will  make  a  full  memo- 
randum, being  particular  to  name  the  parties,  the  subject  matter, 
the  consideration,  the  terms  and  conditions,  and  to  have  this 
memorandum  signed  by  both  parties  to  the  contract.  If  the 
writing  fails  to  state  any  essential  term,  it  is  unenforceable,  for 
that  term  would  have  to  be  proved  by  parol  evidence,  and  the 
statute  forbids  this. 

In  many  states  additional  contracts  requiring  a  writing  are 
enumerated,  as,  for  example,  a  promise  to  pay  a  debt  discharged 
in  bankruptcy,  a  promise  to  pay  a  debt  barred  by  the  Statute  of 
Limitations,  a  promise  after  arriving  at  majority  to  pay  a  debt 
contracted  during  infancy,  the  acceptance  of  a  bill  of  exchange, 
a  fire-insurance  policy,  a  limited  partnership,  a  common-law  mar- 
riage, and  many  others.  Whether  a  particular  contract  must  be  in 
writing  in  a  given  state  can  be  ascertained  only  after  a  careful 
examination  of  the  statutes  of  that  state, 

2.  SeventecntJi  sectioji.  The  seventeenth  section  of  the  Statute 
of  Frauds  provides  that  a  contract  for  the  sale  of  goods,  wares,  and 
merchandise  (that  is,  any  personal  property)  of  the  value  of  ten 
pounds  or  upwards  shall  be  unenforceable  unless  the  buyer  accepts 
part  of  the  goods  so  sold  and  actually  receives  the  same,  or  gives 
something  in  earnest  to  bind  the  bargain  or  in  part  payment,  or 
there  be  a  note  or  memorandum  in  writing  signed  by  the  party 
to  be  charged  or  by  his  authorized  agent. 

It  will  be  observed  that  a  contract  to  sell  land  can  be  evidenced 
in  only  one  way,  namely, ^by  a  writing,  while  a  contract  to  sell 
goods  of  the  value  of  $1^  or  more  may  be  evidenced  in  any  one 
of  three  ways  :  namely,  by  the  acceptance  and  receipt  of  the 
goods  or  a  part  of  them,  by  a  part  payment  of  the  price  or  pay- 
ment of  earnest  money,  and  by  a  writing.  States  differ  as  to 
the  value  below  which  no  special  form  is  required.  Some  fix  it  as 
low  as  $30,  and  one  as  high  as  $2500.    Several  states  do  not 


§  23]  FORM  25 

have  this  portion  of  the  statute  at  all.^  In  these  states  a  contract 
to  sell  goods,  no  matter  of  what  value,  may  be  proved  by  parol 
although  there  has  been  neither  delivery  nor  payment.  It  is  gen- 
erally thought  that  the  statute  as  to  the  sale  of  goods  has  out- 
lived its  usefulness  and  should  be  everywhere  repealed  as  an 
unnecessary  restraint  upon  commerce. 

It  is  difficult  at  times  to  say  whether  a  sale  is  of  real  property 
or  of  personalty.  The  sale  of  standing  trees  to  be  cut  by  the 
buyer  is  generally  held  to  be  a  sale  of  realty ;  but  if  the  seller  is 
to  cut  them,  the  contract  contemplates  that  they  shall  be  personal 
property  when  delivered  to  the  buyer.  Growing  annual  crops, 
known  as  emblements,  are  considered  personalty,  while  fruits, 
grass,  and  other  perennials  are  held  to  be  in  the  same  class  as 
trees.  By  the  Uniform  Sales  Act  (see  sect.  45  post)  a  contract  for 
the  sale  of  articles  attached  to  or  forming  a  part  of  land,  by  which 
such  articles  are  to  be  severed  from  the  land  at  any  time,  is  con- 
sidered a  contract  for  the  sale  of  personal  property. 

23.  Contracts  under  seal.  Any  contract  may  be  made  in  writ- 
ing, under  seal.  Conveyances  of  land  must  be  by  deed,  that  is, 
under  seal ;  but  in  New  York,  although  the  question  is  in  dispute, 
a  seal  seems  no  longer  necessary.  Statutes  may  require  other  con- 
tracts or  conveyances  to  be  sealed,  but  the  modern  tendency  is 
to  decrease  rather  than  to  magnify  the  importance  of  the  seal. 
An  unsealed  contract  is  called  a  simple  contract. 

A  seal  at  common  law  was  an  impression  on  wax  or  other 
adhesive  substance,  affixed  to  the  document  to  be  sealed.    In  the 

1  It  is  not  found  in  Alabama,  Delaware,  Kansas,  Kentucky,  Louisiana,  New 
Mexico,  North  Carolina,  Tennessee,  Texas,  Virginia,  and  West  Virginia. 

In  the  following  states  the  sum  is  fixed  at  530  :  Arkansas,  Maine,  and  Missouri. 

In  New  Hampshire  it  is  fixed  at  $33 ;  in  Vermont,  at  $40. 

In  the  following  states  it  is  fixed  at  $50:  Colorado,  District  of  Columbia, 
(Jeorgia,  Indiana,  Maryland,  Michigan,  Minnesota,  Mississippi,  Nebraska,  New 
York,  (Oklahoma,  Oregon,  South  Carolina,  South  Dakota,  Washington,  Wisconsin, 
and  Wyoming. 

In  Connecticut,  Hawaii,  and  Michigan  it  is  fixed  at  ;?ioo. 

In  California,  Montana,  Nevada,  and  Utah  the  amount  is  $200. 

In  Alaska,  Arizona,  Idaho,  Illinois,  M*as.sachusetts,  New  Jersey,  North  Dakota, 
Pennsylvania,  and  Rhode  Island  the  sum  is  $500. 

In  Ohio  the  sum  is  fixed  at  S2500. 

In  the  following  states  a  contract  for  the  sale  of  goods  of  any  value,  however 
small,  must  conform  to  the  Statute  of  Frauds:    Florida.  Iowa. 


26  FORMATION  OF  CONTRACTS  [Ch.  II 

Middle  Ages,  when  few  persons  could  write,  each  important  per- 
son had  his  own  seal,  or  signet,  which  took  the  place  of  his  signa- 
ture. In  modern  times  a  mere  scroll  with  the  pen  is  declared  by 
statute,  in  most  states,  to  be  a  sufficient  seal.  The  commonest 
form  is  to  write  the  word  "seal"  after  the  name  and  make  a 
rough  circular  scroll  around  it  with  the  pen. 

While  very  few  contracts  must  bear  a  seal,  any  contract  may 
bear  one.  If  a  contract  is  sealed,  it  has  certain  characteristics 
which  it  would  not  have  if  it  were  unsealed.  Chief  among  these 
are  the  following : 

1.  At  common  law  the  contract  under  seal  does  not  require 
any  consideration,  l^^or  example,  a  father  promises  under  seal  to 
pay  his  son  one  thousand  dollars,  this  being  merely  a  gift  with- 
out consideration.  Such  an  instrument  is  called  a  bond  and  is 
enforceable.  Were  such  promise  made  in  an  unsealed  instru- 
ment, the  son  could  not  enforce  it  for  want  of  consideration. 
Were  it  made  in  a  negotiable  promissory  note,  the  son  could  not 
enforce  it ;  but  if  he  negotiated  it  to  another  person  who  paid 
value  and  had  no  notice  of  the  absence  of  consideration,  the 
transferee  could  enforce  it. 

By  statute  in  many  states  the  common-law  rule  upon  this  point  has  been 
changed  and  the  seal  is  made  merely  presumptive  evidence  of  consideration ; 
that  is,  it  dispenses  with  the  necessity  of  the  proving  of  consideration  by  the 
one  who  seeks  to  recover  upon  the  instrument,  but  it  leaves  the  defendant 
free  to  prove  that  there  was  no  consideration  and  thus  to  defeat  the  instru- 
ment. Even  this  statutory  provision  has  not,  however,  succeeded  everywhere 
in  depriving  the  seal  of  its  importance  as  a  substitute  for  consideration.  Some 
courts  have  held  that  if  the  seal  is  used  expressly  to  give  validity  to  a  gratui- 
tous promise,  it  will  be  effective  for  that  purpose  notwithstanding  the  statute ; 
but  if  it  is  used  in  a  contract  where  a  consideration  was  intended  but  has 
failed,  the  defendant,  notwithstanding  the  seal,  may  prove  that  there  is  no  con- 
sideration, and  thus  defeat  the  contract.  Under  this  holding,  a  bond  to  give 
money  without  consideration  would  be  good,  while  a  bond  to  pay  money  for 
services  to  be  rendered  would  not  be  enforceable  in  case  the  consideration 
failed,  that  is,  if  the  services  were  not  rendered. 

In  some  states  a  sealed  contract  is  by  statute  put  upon  precisely  the  same 
basis  as  an  unsealed  contract ;  that  is,  seals  are  practically  abolished. 

2.  Only  the  parties  to  a  sealed  instrument  may  sue  or  be  sued 
upon  it.    In  an  action  upon  an  unsealed  contract  it  may  be  shown 


§  24]  LEGALITY  27 

that  a  party  named  is  in  fact  an  agent  for  a  party  unnamed,  and 
the  latter  may  sue  or  be  sued  upon  such  unsealed  contract. 

3.  A  right  of  action  upon  a  sealed  contract  is  not  usually 
barred  by  the  Statute  of  Limitations  as  soon  as  an  action  upon 
a  simple  contract.  The  period  allowed  upon  a  sealed  contract 
varies  in  the  different  states  from  ten  to  twenty  years,  while  the 
period  allowed  upon  a  simple  contract  is  usually  not  more  than 
six  years. 

Examples:  i.  "I  promise  to  pay  John  H.  Blackhcath  one  thousand 
dollars  on  February  10,  1906.  William  Blackheath."  This  is  a  simple 
contract  to  pay  money ;  if  made  as  a  gift,  no  one  can  enforce  it. 

2.  "  I  promise  to  pay  to  John  H.  Blackheath,  or  order,  one  thousand 
dollars  on  February  10,  1906.  William  Blackheath."  This  is  a  negoti- 
able promissory  note.  If  made  as  a  gift,  John  cannot  enforce  it;  but  he  could 
negotiate  it  to  another  person  who  might  enforce  it. 

3.  "  Know  all  men  by  these  presents  :  That  I,  William  Blackheath,  am 
held  and  firmly  bound  unto  John  H.  Blackheath  in  the  sum  of  one  thousand 
dollars  to  be  paid  to  the  said  John  H.  Blackheath,  his  executors,  administra- 
tors, or  assigns,  on  February  i  o,  1 906 ;  to  which  payment  I  bind  myself,  my 
executors  and  administrators  by  these  presents. 

"  Witness  my  hand  and  seal  this  tenth  day  of  February,  one  thousand  nine 

hundred  and  five. 

William  Blackheath.     [Seal] " 

This  is  a  bond.  Although  made  as  a  gift,  John  may  enforce  it  at  common 
law. 

V.    Legalitv  of  Or.jECT 

24.  Contracts  made  illegal  by  statute.  The  statutes  may 
declare  a  contract  to  be  illegal,  may  prohibit  it,  or  may  simply 
penalize  it.  It  is  a  question  of  construction  whether  prohibited 
and  penalized  contracts  are  illegal. 

1.  Certain  contracts  are  declared  by  statute  to  be  illegal.  Such 
are  contracts  for  gambling  or  wagering,  contracts  for  usury,  in 
some  states  contracts  for  work,  labor,  or  any  unnecessary  act 
to  be  performed  on  Sunday,  and  in  some  states  any  contract 
made  on  .Sunday,  even  thougli  performance  is  to  be  made  on 
a  secular  day. 

2.  Certain  acts  are  prohibited  by  statute.  A  contract  to 
perform  a  prf)hibitcd  act,  or  involving  such  an  act,  would  be 
an   illegal  contract. 


28  FORMATION  OF  CONTRACTS  [Cii.  II 

Example  i.  The  statute  proliibits  prize  fighting.  A  contract  to  engage 
in  a  prize  fight  is  illegal.  Again,  the  statute  prohibits  any  person  from 
engaging  in  the  practice  of  medicine  without  first  obtaining  a  license.  An 
unlicensed  physician  cannot  recover  compensation  for  professional  services. 
A  teacher  cannot  recover  for  his  services  in  a  public  school  unless  he  is 
duly  licensed. 

3.  Certain  acts  are  penalized  by  statute  but  arc  not  in  terms 
prohibited.  In  such  cases  it  is  a  question  of  construction  whether 
a  contract  to  do  the  act  is  illegal. 

Examples :  2.  The  statute  provides  that  anyone  who  sells  a  lot  in  a  plat 
in  any  city  without  first  recording  the  plat  in  the  appropriate  public  office 
shall  pay  a  penalty  of  550  for  each  offense.  A  sells  B  a  lot  in  an  unrecorded 
plat.  B  afterwards  refuses  to  take  the  lot  and  pay  the  purchase  price.  Is  the 
contract  of  sale  of  this  lot  an  illegal  contract?  It  has  been  held  not,  because 
the  court  thought  it  was  not  the  object  of  the  statute  to  prohibit  such  sales, 
but  merely  to  make  it  so  expensive  to  deal  in  lots  in  unrecorded  plats  that 
landowners  would  be  induced  to  record  the  plats. 

3.  The  statute  fixes  a  penalty  for  the  sale  of  adulterated  foods.  B  sells  to 
C  a  quantity  of  adulterated  foods.  C  is  not  bound.  He  may  refuse  to  take 
the  goods  and  pay  the  price,  on  the  ground  that  B's  contract  is  illegal.  The 
intent  of  the  statute  is  to  prevent  the  sale  of  adulterated  goods. 

25.  Wagering  contracts.  A  wagering  contract  is  an  agreement 
to  give  money  or  property  upon  the  determination  or  ascertain- 
ment of  an  uncertain  event.  The  consideration  for  such  promise 
may  be  either  a  like  promise  or  something  given  outright. 

Exatnples  .•  i .  A  and  B  contract  that  if  A's  horse  wins  a  race  with  B's 
horse,  B  shall  pay  A  $100 ;  but  if  B's  horse  wins,  A  shall  pay  B  $100. 

2.  A  promises  to  pay  B  $100  in  case  B's  horse  wins,  provided  B  pay  A 
in  hand  $20.  If  B's  horse  wins,  A  would  pay  B  $100  and  would  be  $80  out 
of  pocket;  if  B's  horse  loses,  A  has  his  $20  and  B  is  that  much  out  of 
pocket. 

3.  A,  B,  and  C  each  pay  an  entrance  fee  as  a  condition  of  competing 
for  a  purse  or  prize  at  a  horse-racing  contest.  This  is  not  a  wager  unless  the 
competitors  are  the  sole  contributors  to  the  purse  and  thus  practically  bet  each 
against  the  others,  or  unless  this  form  is  adopted  as  a  subterfuge  to  conceal 
a  wager. 

It  seems  that  by  the  common  law  of  England  wagering  con- 
tracts were  not  illegal.  Judges  later  regretted  that  the  law  was 
not  otherwise,  and  became  very  astute  in  finding  reasons  for  hold- 
ing particular  wagers  'ilegal,  as,  for  example,  that  a  wager  on  the 


§  25J  LEGALITY  29 

life  of  Napoleon  was  illegal  because  it  gave  one  wagerer-an  inter- 
est in  keeping  the  king's  enemy  alive  and  the  other  an  interest  in 
compassing  his  death  by  means  other  than  lawful  warfare.  But 
even  with  such  refinements  as  these  the  courts  felt  bound  to  en- 
force many  wagers.  In  New  York  wagers  were  held  to  be  legal. 
In  Massachusetts,  however,  the  courts  refused  to  follow  the  Eng- 
lish rule  and  held  them  to  be  illegal.  Now,  by  statute,  they  are 
generally  declared  to  be  illegal  in  all  jurisdictions. 

Wagers  on  the  fise  and  fall  of  prices.  The  form  of  this  wager 
is  that  one  party  sells  another  grain  or  stock  for  future  delivery 
at  a  specified  price  ;  but  in  fact  neither  party  intends  an  actual 
delivery,  and  both  intend  to  settle  on  the  delivery  day  the  differ- 
ence between  the  contract  price  and  the  market  price  in  money. 
It  is  equivalent  to  betting  that  the  market  price  on  a  certain  day 
will  be  so  much.  Often  these  take  the  form  of  "  options  "  as  well 
as  "  futures  "  ;  that  is,  A  sells  B  the  option  to  call  for  wheat  on  a 
certain  day  at  a  certain  price,  or  A  sells  B  the  option  to  deliver 
wheat  on  that  day  at  a  certain  price,  or  A  may  sell  B  the  option 
to  call  at  one  price  or  deliver  at  another ;  the  first  is  termed  a 
"call,"  the  second  a  "put,"  and  the  third  a  "spread"  or  a 
"  straddle."  Whenever  the  intent  is  merely  to  settle  the  gain  or 
loss  in  money,  and  there  is  no  intent  to  deliver  or  receive  the 
article  itself,  the  transaction  is  a  gambling  contract  and  illegal. 

Examples :  4.  "  I  have  sold  John  Doe  100  shares  of  stock  in  the  XY 
Co.  at  85  per  cent,  payable  and  deliverable  at  seller's  option  in  30  days. 
Richard  Roe."  This  may  be  a  valid  contract  giving  the  seller  the  right  to 
deliver  the  stock  at  any  time  within  30  days  at  $85  a  share  (par  value  $100); 
or  it  may  be  intended  that  on  any  day  when  that  stock  is  worth  say  $80  a  share, 
the  transaction  shall  be  closed  by  the  buyer  paying  the  seller  $500.  The  trans- 
action must  be  closed  at  the  end  of  30  days  if  not  closed  earlier. 

5.  "  For  value  received  the  bearer  may  call  on  me  for  10,000  bushels  of 
wheat  at  70  cents  a  bushel  on  Sept.  i,  1905.  Richard  Rok."  This  is  a 
"call."  The  buyer  on  September  I  will  "call"  for  the  wheat  if  it  is  more 
than  70  cents  a  bushel,  but  not  if  it  is  less.  If  it  is  more,  he  makes  the  excess, 
less  what  he  paid  for  the  option ;  if  it  is  less,  he  loses  what  he  paid  for  the 
option.  When  the  differences  are  intended  to  be  settled  in  money  this  is  a 
gambling  contract,  but  it  is  perfectly  valid  if  actual  delivery  is  intended. 

6.  "  For  value  received  the  bearer  may  deliver  to  me  10,000  bushels  of 
wheat  at  70  cents  a  bushel  on  Sept.  I,  1905.  RicHAKD  RoK."  This  is  a 
"put."    If  wheat  is  60  cents  a  bushel  on  Septemher  i,  the  seller  will  "put" 


30 


FORMATION  OF  CONTRACTS  [Ch.  II 


it  on  Roe.  who  must  pay  lo  cents  a  bushel  to  the  seller.  The  latter  thereby 
makes  f  looo,  less  what  he  paid  for  the  option.  If  it  is  more  than  70  cents  a 
bushel,  the  seller  will  not  "  put "  it,  and  he  loses  what  he  paid  for  the  option. 
But  this  contract  is  valid  if  actual  delivery  is  intended. 

7.  "  For  value  received  the  bearer  may  call  on  mc  for  10,000  bushels  of 
wheat  at  80  cents  a  bushel  any  time  in  60  days  from  date ;  or  the  bearer  may 
at  his  option  deliver  the  same  to  me  at  75  cents  a  bushel.  Richard  Rok." 
This  is  a  "spread."  If  the  call  and  put  prices  were  the  same,  it  would  be  a 
"straddle."  If  actual  delivery  is  intended  (as  it  rarely  is),  this  would  be  a 
valid  contract ;  but  if  it  is  intended  to  settle  gains  or  losses  in  money,  it  is 
a  gambling  contract. 

Insurance.  Insurance  was  at  one  time  a  favorite  wagering  con- 
tract. Thus,  persons  not  at  all  interested  in  a  ship  or  its  cargo 
would  take  out  insurance  upon  it,  in  order  that  if  it  was  lost  they 
might  recover  the  amount  named  in  their  policies.  Very  often 
insurance  was  taken  upon  lives  in  which  the  policyholder  had  no 
interest.  This  is  in  general  made  illegal  by  statute.  In  order  that 
an  insurance  policy  may  be  legal,  the  one  insured  must  have  some 
insurable  interest  in  the  property  or  the  life  covered  by  the  policy. 
Even  in  such  cases  the  insurance  contract  is  a  kind  of  wagering 
contract,  but  it  is  one  permitted  by  the  policy  of  the  law. 

26.  Contracts  illegal  at  common  law.  The  common  law  has 
indicated  a  very  considerable  number  of  instances  in  which  it  will 
regard  contracts  as  illegal  because  contrary  to  public  policy.  Only 
a  few  of  them  can  be  enumerated. 

1 .  Contracts  to  commit  crimes  or  civil  wrongs  (torts)  are  illegal. 
Thus,  a  contract  to  commit  an  assault  would  be  illegal  for  both 
reasons,  since  an  assault  is  both  a  crime  and  a  tort. 

2.  Contracts  to  do  acts  which  injure  the  public  service  or  inter- 
fere with  the  administration  of  justice  are  illegal.  A  contract  to 
obtain  a  public  office  or  vote  for  another  for  office,  to  influence 
legislative  action  by  lobbying,  to  quiet  competition  for  public  con- 
tracts, to  stifle  the  prosecution  for  a  public  offense,  to  carry  on 
a  suit  as  an  attorney  at  the  expense  of  the  attorney  and  share 
the  proceeds  (champerty),  to  suborn  witnesses,  and  the  like,  are 
all  illegal. 

3.  Contracts  which  affect  the  freedom  or  security  of  marriage 
are  illegal.  Such  is  a  contract  to  procure  a  collusive  divorce ;  and 
such  is  a  marriage-brokerage  contract,  that  is,  a  contract  by  A  to 


§26]  LEGALITY  31 

procure  or  bring  about  a  marriage  between  B  and  C  for  a  con- 
sideration paid  or  to  be  paid  by  either  B  or  C  to  A. 

4.  Contracts  in  restraint  of  trade  may  be  legal  or  illegal,  accord- 
ing as  the  restraint  is  reasonable  or  unreasonable.  Such  a  contract 
is  reasonable  when  it  is  reasonably  necessary  to  protect  the  prom- 
isee and  not  injurious  to  the  interests  of  the  public.  Beyond  this 
point  it  is  unreasonable  and  illegal. 

The  great  increase  in  trusts  and  monopolies  within  recent  years 
has  caused  the  federal  legislature  and  many  state  legislatures  to 
enact  laws  on  the  subject  of  restraint  of  trade.  Congress  in  1887 
passed  the  Interstate  Commerce  Act  to  provide  for  the  regulation 
of  interstate  transportation ;  in  1890  it  passed  the  Sherman  Anti- 
Trust  Act  to  regulate  interstate  commerce,  aside  from  transportation 
and  banking,  and  by  that  act  made  contracts  in  restraint  of  inter- 
state trade  illegal  and  persons  creating  a  monopoly  in  interstate 
trade  guilty  of  a  misdemeanor;  in  1914  it  passed  the  Clayton 
Act,  which  specifies  certain  acts  which  shall  be  deemed  to  be  un- 
reasonably in  restraint  of  trade  and  illegal,  and  it  also  passed  the 
Federal  Trade  Commission  Act,  which  constitutes  the  Federal 
Trade  Commission  the  regulator  of  interstate  commerce,  with 
power  to  inquire  into  acts  in  restraint  of  trade  and  to  issue  orders 
which  are  subject  to  review  by  the  courts.  Various  state  acts  also 
provide  against  contracts  which  tend  to  monopoly  or  restraint  of 
trade  within  the  several  states. 

Examples :  i.  A  buys  B's  retail  shoe  store  in  the  city  of  Ithaca,  and  B 
agrees  not  to  engage  again  in  the  shoe  trade  in  Ithaca.  This  is  reasonably  nec- 
essary to  protect  A  against  B's  competition,  and  is  held  to  be  not  so  injurious 
to  the  public  as  to  render  it  against  public  policy.  If  B  agrees  not  to  engage 
in  the  retail  shoe  trade  in  the  state  of  New  York,  this  would  be  obviously  a 
greater  restraint  than  is  reasonably  necessary  and  would  be  illegal.  If  he  agrees 
not  to  engage  in  the  retail  shoe  trade  in  the  county  in  which  Ithaca  is  situated, 
this  might  be  reasonable  or  unreasonable,  according  to  circumstances.  Some 
states  hold  any  restraint  which  includes  the  whole  of  the  state  to  be  unreason- 
able, but  this  is  contrary  to  modern  tendencies. 

2.  The  maker  of  guns  and  heavy  ordnance  of  which  governments  were  the 
chief  purchasers  sold  his  business  and  agreed  that  for  twenty-five  years  he 
would  not  engage  in  a  like  business  anywhere  in  the  world.  It  was  held  by 
the  English  court  that  this  restraint  was  reasonably  necessary  to  protect  the 
purchaser,  since  a  manufactory  of  such  guns  anywhere  in  the  world  would  be 
a  competitor. 


32  FORMATION  OF  CONTRACTS  [Ch.  II 

3.  If  the  business  is  one  carried  on  under  a  public  franchise  (as  a  franchise 
to  lay  gas  pipes  in  public  streets),  or  if  it  is  impressed  wilii  a  public  trustor  in- 
terest (as  the  business  of  a  common  carrier  who  must  serve  ail  members  of  the 
pubUc  on  equal  terms),  the  courts  may  hold  even  a  local  restraint  unreasonable, 
not  as  to  the  promisee  but  as  to  the  public  whom  the  parties  are  bound  to  serve. 

4.  Agreements  to  combine  for  the  purpose  of  lessening  competition,  limit- 
ing the  output,  regulating  prices,  dividing  the  territory  in  which  business  shall 
be  done,  and  the  like,  are  illegal  because  detrimental  to  the  public  welfare. 

27.  Effect  of  illegality  upon  contracts  in  which  it  exists.    In 

determining  the  effect  of  illegality  upon  a  contract  in  which  it  ex- 
ists, it  is  necessary  to  determine  whether  the  contract  is  divisible 
or  indivisible,  and  if  divisible,  whether  the  legal  may  be  separated 
from  the  illegal  portion, 

1.  If  a  contract  is  indivisible,  that  is,  if  it  has  one  indivisible 
promise  or  act  on  one  side  and  one  on  the  other,  the  whole  con- 
tract must  fail  if  one  of  these  is  illegal. 

Example  i .  A  agreed  to  work  for  B  for  a  specified  sum  per  month,  and  to 
take  charge  of  B's  barroom  and  bar.  It  was  illegal  to  maintain  a  bar  for  the 
sale  of  intoxicating  liquors.  A  performed  various  services  including  the  sale  of 
liquors  at  the  bar.  A  cannot  recover  the  agreed  price  for  his  services  because 
A's  promise  to  perform  the  services  is  an  indivisible  one  and  is  tainted  with 
illegality.  He  cannot  recover  for  the  legal  services,  that  is,  those  not  connected 
with  the  sale  of  liquors,  because  the  promise  of  B  is  not  apportioned  but  en- 
tire, and  the  promises  and  acts  of  A  are  also  entire.  The  whole  contract  must 
therefore  be  regarded  as  illegal  and  unenforceable. 

2.  If  the  contract  is  divisible,  that  is,  if  there  are  two  or  more 
promises  on  one  side  and  a  separate  consideration  for  each  on  the 
other  side,  and  if  the  legal  may  be  separated  from  the  illegal,  the 
legal  portion  may  be  enforced  unless  the  illegal  part  is  so  immoral 
or  criminal  that  the  court  thinks  it  best  to  give  the  parties  no  relief. 

Example  2.  A  sells  his  retail  business  to  B  for  $10,000,  and  in  considera- 
tion of  $1000  more  A  agrees  not  to  engage  in  a  similar  business  again  any- 
where in  the  state.  The  second  agreement  is  illegal  as  an  unnecessary  restraint 
of  trade,  but  it  rests  upon  a  separate  consideration  and  can  therefore  be  sepa- 
rated from  the  legal  part,  and  the  latter  may  be  enforced. 

3.  Ordinarily  the  law  gives  no  relief  to  either  party  to  an  illegal 
contract,  either  by  enforcing  the  contract  or  by  allowing  a  party  to 
it  to  recover  anything  paid  or  advanced  under  it.  But  it  may  aid 
a  party  to  get  back  what  he  has  paid,  provided  he  is,  as  compared 


§  2SJ  REALITY  OF  CONSENT  33 

with  the  other  party,  innocent  of  an  illegal  intent,  or  provided  his 
recovery  of  the  money  would  prevent  the  illegal  transaction  from 
being  carried  out.  Statutes  often  provide  that  money  paid  on  a 
gambling  contract  may  be  recovered. 

Examples:  3.  A  marriage  broker  induces  an  ignorant  immigrant  to  pay 
him  money  to  secure  her  a  husband.  The  court  thinks  the  parties  are  not  in 
equal  guilt,  since  the  woman  is  ignorant  and  is  played  upon  by  the  superior 
ability  of  the  broker,  and  permits  her  to  recover  the  money. 

4.  A  pays  B  a  sum  of  money  to  commit  an  assault  on  C.  To  allow  A  to 
recover  this  before  the  assault  is  committed  would  remove  the  inducement  for 
B  to  commit  the  assault.  Such  recovery  is  not  out  of  consideration  for  A  but 
out  of»consideration  for  C  and  the  public  peace. 

VI.    Reality  of  Consent 

Agreement  consists  in  the  meeting  of  the  minds  of  the  parties. 
But  if  one  mind  or  both  give  consent  by  mistake,  or  if  one  is 
misled  by  misrepresentation  or  fraud,  or  if  one  is  compelled  by 
duress  or  undue  influence,  there  may  be  no  true  agreement.  In 
such  cases  the  contract  may  be  avoided  by  the  party  misled.  We 
have  then  to  consider  the  effect  of  mistake,  fraud,  duress,  and 
undue  influence. 

28.  Mistake.  Mistake  about  some  material  fact  connected  with 
the  contract  may  be  mutual,  that  is,  common  to  both  parties,  or 
unilateral,  that  is,  made  by  one  party  alone,  (i)  The  fact  about 
which  a  mutual  mistake  occurs  may  be  as  to  the  subject  matter 
of  the  contract,  namely,  {a)  its  existence,  {b)  its  identity,  or  (r)  its 
quality.  (2)  Unilateral  mistake  may  be  {a)  unknown  to  the  other 
party,  {b)  known  to  the  other  party,  {c)  as  to  the  identity  of  a 
party,  or  (<-/)  as  to  the  nature  of  the  transaction  itself. " 

(i)  {a)  Mutual  mistake  as  to  the  existence  of  the  subject  matter 
of  the  contract  really  prevents  a  contract  from  being  formed  at  all. 

Examples:  i.  A  sells  B  a  horse.  Unknown  to  either  party  the  horse 
died  before  the  contract  was  made.  There  is  no  contract,  because  there  is 
no  subject  matter  upon  which  the  minds  of  the  parties  could  meet. 

2.  A  cargo  is  at  sea.  The  owner  sells  it  subject  to  the  risk  of  its  being 
already  lost.  The  buyer  is  bound  although  the  cargo  was  lost  when  the  con- 
tract was  made,  because  the  buyer  a.ssumes  the  risk.  There  is  no  mistake,  be- 
cause that  risk  is  a  part  of  the  subject  matter  of  the  contract.  If  the  owner 
knew  it  was  lost,  the  contract  can   be  avoided  for   fraudulent  concealment. 


34  FORMATION  OF  CONTRACTS  [Ch.  II 

{/f)  Mutual  mistake  as  to  the  identity  of  the  subject  matter 
enables  either  party   to  avoid   the  eontract. 

Example  3.  A  says,  "  I  have  purchased  X's  horse,  Billy,  and  will  sell  him 
to  you  for  $250."  B  replies,  "  I  will  take  him  at  that  price."  X  had  two 
horses  named  Billy.  A  knew  only  the  one  he  bought  and  B  knew  only  of 
the  other.  There  is  no  binding  contract.  The  minds  have  not  met  upon  the 
same  subject  matter. 

(r)  Mutual  mistake  as  to  the  quality  of  an  article  will  not  ordi- 
narily affect  the  validity  of  a  contract. 

Example  4.  A  finds  a  stone  which  appears  to  be  a  jewel  of  some  kind,  and 
thinks  it  is  a  topaz.  B,  equally  uncertain  as  to  its  quality  or  value,  buys  it  for 
a  small  sum.  It  turns  out  to  be  an  uncut  diamond  of  great  value.  The  contract 
is  binding.  Neither  party  knew  the  true  nature  of  the  stone,  and  each  had  an 
equal  opportunity  to  ascertain. 

(2)  {(i)  Unilateral  mistake  unknown  to  the  other  party  is  not 
ordinarily  a  ground  for  avoiding  a  contract. 

Example  5.  A  sells  the  stone  (as  above),  believing  it  to  be  a  topaz. 
B  knows  it  is  a  diamond  but  is  ignorant  of  A's  belief.  The  contract  is 
binding.  A  alone  is  mistaken  and  B  has  neither  induced  A's  mistake  nor 
taken  fraudulent  advantage  of  it. 

(b)  Unilateral  mistake  known  to  the  other  party  and  taken 
advantage  of  by  him  may  enable  the  mistaken  party  to  avoid 
the  contract.  But  this  doctrine  has  rather  narrow  limits.  If  the 
opportunity  of  knowledge  is  equally  open  to  both  parties,  one 
is  not  bound  to  reveal  to  the  other  what  he  has  by  superior 
diligence   discovered. 

Examples :  6.  A  buys  of  B  the  negotiable  paper  of  X.  A  believes  X  to 
be  solvent.  B  has  just  learned  of  X's  insolvency  and  knows  that  A  has  not 
yet  learned  of  it  or  had  a  reasonable  opportunity  to  learn  of  it.  A  may  avoid 
the  contract.    B's  fraudulent  concealment  is  fatal. 

7.  A  sells  his  land  to  B.  There  is  a  valuable  mine  in  it.  A  does  not  know 
this.  B  does  know  it  and  knows  that  A  is  ignorant  of  it.  The  contract  is 
binding.  B  is  not  bound  to  disclose  what  A  has  had  &n  equal  opportunity  to 
discover,  but  B  must  not  by  any  word  or  artifice  mislead  A. 

8.  A  sells  cotton  to  B,  the  price  being  dependent  upon  whether  the  war 
between  the  United  States  and  Great  Britain  is  ended.  A  asks  B  whether  there 
is  any  news  of  peace.  B,  knowing  that  peace  has  been  declared,  says  there  is 
no  news.    He  thereby  confirms  A's  mistake  and  A  may  avoid  the  contract. 


§29]  REALITY  OF  CONSENT  35 

(c)  Unilateral  mistake  as  to  the  identity  of  the  other  party 
will  avoid  a  contract. 

Exatnple  ().  A, has  been  accustomed  to  deal  with  B.  Unknown  to  A, 
B  has  sold  his  business  to  C.  A  sends  an  order  for  goods  to  B.  C  gets  the 
order  and  ships  the  goods.  A  is  not  bound.  He  has  a  right  to  select  whom 
he  will  deal  with,  and  is  not  obliged  to  have  another  person  than  B  introduced 
into  the  contract. 

{d)  Unilateral  mistake  as  to  the  nature  of  the  contract  may 
avoid  it. 

Examples:  10.  A  is  induced  by  a  trick  of  B  to  sign  a  negotiable  note, 
thinking  he  is  signing  a  contract  to  sell  goods  for  B.    A  is  not  bound. 

1 1 .  As  above.  B  indorses  the  note  to  C,  who  pays  value  for  it  in  igno- 
rance of  B's  fraud.  A  is  not  liable  to  C  unless  C  shows  that  A's  negligence 
in  signing  the  note  is  so  great  as  to  make  it  just  that  he  should  suffer  rather 
than  C.  When  the  rights  of  an  innocent  third  party  are  in  question,  A  may 
be  estopped  to  set  up  the  mistake  and  the  fraud.  Whether  A's  negligence 
is  so  great  as  to  work  such  an  estoppel  is  a  question  of  fact. 

29.  Fraud  and  misrepresentation.  Fraud  consists  in  a  false 
representation  of  fact,  made  with  knowledge  of  its  falsity  (or 
with  reckless  disregard  of  its  truth  or  falsity),  with  the  inten- 
tion that  it  should  be  acted  upon  by  another,  and  actually 
inducing  that  other  to  act  upon  it  to  his  damage.  Fraud  by 
one  party  enables  the  other  party  to  a  contract  to  rescind  it. 
Fraud  is  also  a  tort,  and   is  called  deceit  in  the  law   of  torts. 

Example  l.  A  seller  of  a  horse  represents  him  to  be  sound  and  healthy 
when,  known  to  the  seller  and  unknown  to  the  buyer,  he  has  the  glanders. 
The  buyer  acts  upon  the  representation,  buys  the  horse,  and  afterwards  dis- 
covers that  it  is  diseased.  The  buyer  may  either  {a)  rescind  the  contract,  that 
is,  return  the  horse  and  recover  the  purchase  money,  or  (b)  keep  the  horse 
and  recover  damages  in  an  action  in  tort  for  deceit. 

If  in  the  above  case  the  seller  actually  believes  the  horse  to 
be  sound  when  he  makes  the  statement,  there  is  no  fraud  but 
merely  innocent  misrepresentation.  In  such  case  there  can  be 
no  action  for  deceit,  since  in  order  to  base  an  action  for  deceit 
it  is  ncces.sary  either  to  show  that  the  seller  knew  that  what  he 
said  was  false  or  to  show  that  he  knew  that  he  did  not  know 
whether  it  was  true  or  false,  that  is,  made  the  statement  without 
any  belief  and  in  reckless  disregard  of  its  truth  or  falsity.     At 


36  FORMAllON  OF  CONTRACTS  [Cii.  II 

common  law  a  contract  would  not  be  set  aside  for  innocent  mis- 
representation, and  this  is  probably  the  generally  accepted  rule, 
although  the  equity  courts  often  set  contracts  aside  upon  this 
ground. 

Misrepresentations-  of  fact  may  take  the  form  of  warranties, 
in  which  case  they  become  collateral  contract  promises,  and 
an  action  lies  for  the  breach  of  them  (see  sect.  53  post). 
Representations  may  become  a  part  of  the  main  contract,  and 
then  if  they  are  false  the  contract  is  broken  and  an  action  lies 
for  its  breach.  Whether  a  representation  merely  induces  one 
to  make  a  contract,  or  becomes  a  warranty,  or  becomes  a  term 
of  the  contract  itself,  is  a  matter  of  construction  too  difficult 
to  be  treated  here. 

Example  2.  The  seller  of  a  horse  says,  "  I  warrant  him  to  be  sound  and 
healthy."  Unknown  to  either  party,  the  horse  has  the  glanders.  The  buyer 
has  an  action  in  contract  against  the  seller  for  a  breach  of  warranty.  If  the 
seller  knew  the  horse  had  the  glanders,  the  buyer  could,  at  his  election,  sue 
for  breach  of  warranty,  or  sue  in  tort  for  deceit,  or  rescind  the  contract  and 
recover  the  purchase  money. 

If  the  misrepresentation  is  as  to  a  matter  of  opinion  rather 
than  of  fact,  there  is  no  actionable  fraud,  because  the  injured 
party  has  no  right  to   rely  upon  it. 

Example  3.  The  seller  of  a  horse  says,  "  This  horse  is  the  fastest  animal 
in  the  county."  No  sensible  buyer  would  attach  any  importance  to  such  a 
''  puff "  by  a  seller. 

In  some  cases  where  the  defect  is  not  discoverable  upon 
examination,  and  is  a  fatal  one,  the  seller  may  be  under  a  duty 
to  disclose  it  to  the  buyer.  The  general  rule,  however,  is  caveat 
emptor,  "let  the  buyer  beware."  But  in  no  case  must  the  seller 
resort  to  "artful  concealment"  to  cover  up  a  defect. 

Example  4.  B  sells  C  a  mahogany  log  too  large  to  be  easily  rolled  over, 
and  conceals  a  defect  by  rolling  the  defective  part  next  the  ground.  This  is 
artful  concealment  for  which  the  buyer  may  rescind. 

30.  Duress.  Duress  consists  in  actual  or  threatened  violence 
or  imprisonment  whereby  the  will  of  a  contracting  party  is 
coerced.  Such  threatened  violence  or  imprisonment  may  be 
directed  against  oneself  or  against  a  member  of  one's  family. 


§31]  PRACTICAL  SUGGESTIONS       {j}^        37 

Whatever  threat  overcomes  the  will  of  the  contracting  party 
and  compels  him  to  do  what  he  otherwise  would  not  do  may 
in  general  be  regarded  as  duress. 

Example.  A's  son  has  been  in  B's  employment  and  is  charged  with 
embezzlement.  B  threatens  to  have  the  son  arrested  and  prosecuted  unless 
A  pays  or  secures  to  B  the  sum  alleged  to  have  been  taken.  A  gives  B  his 
note  for  the  amount.  This  note  may  be  avoided  upon  the  ground  that  it 
was  given  under  duress,  that  is,  under  the  fear  occasioned  by  B's  threat  to 
imprison  A's  son. 

31.  Undue  influence.  Undue  influence  consists  in  an  uncon- 
scientious use  of  power  over  the  will  of  another,  whereby  that 
other  is  induced  to  make  contracts  or  gifts  which  he  otherwise 
would  not  make.  It  is  a  subtle  form  of  duress  whereby  a  per- 
son of  superior  intellect  and  will  dominates  one  of  inferior 
capacity  or  experience. 

Example.  A  stepfather  manages  the  property  of  his  infant  stepchildren. 
As  each  one  becomes  of  age  the  stepfather  buys  the  property  or  interest,  takes 
a  conveyance,  and  pays  an  inadequate  consideration.  The  conveyances  so 
obtained  may  be  set  aside,  since  the  influence  of  the  parent  or  guardian  is 
presumed  to  continue  for  some  time  after  the  child  or  ward  reaches  his  majority, 
and  the  contract  is  made  under  such  undue  influence  as  is  unfair. 

In  some  cases,  as  par^t  and  child,  or  attorney  and  client, 
the  law  presumes  that  the  parent  or  attorney  exercised  undue 
influence.  In  other  cases  the  burden  is  upon  one  who  seeks 
to  set  aside  a  transaction  to  show  that  undue  influence  was  in 
fact  exerted. 

How    TO   MAKE    A    CONTRACT 

The  object  in  drawing  up  a  contract  should  be  to  embody  the  exact 
agreement  of  the  parties  in  such  a  manner  that  no  future  misunderstandings 
as  to  its  terms  shall  arise.  There  is  a  rule  of  law  that  when  a  contract  is  reduced 
to  writing,  the  terms  of  the  written  instrument  cannot  be  contradicted  or  varied 
by  parol  evidence.  While  there  are  some  exceptions  to  this  rule,  not  necessary 
to  be  mentioned  here,  the  rule  is  very  general  in  its  application  and  should  be 
borne  in  mind  when  the  contract  is  written  and  executed.  A  very  good  way 
is  for  each  party  to  put  in  one-two-three  order  the  promises  he  is  ready  to  make, 
and  for  the  other  party  to  see  whether  these  are  the  promises  he  is  willing  to 
accept.  When  these  bilateral  promises  are  embodied  in  the  written  instrument, 
the  whole  should  be  carefully  conisidered  again  in  order  to  make  sure  that  each 
party  has  given  and  exacted  just  what  he  intends.  It  is  very  unwise  to  leave 
anything  to  an  outside  parol  agreement. 


38  FORMA  ri(lN  OF  CONTRACTS  [Ch.  II 

A  general  form  of  a  contract  is  here  given.  The  particulars  may  be  varied 
according  to  the  actual  agreement. 

"  This  Acrick.mknt,  made  in  duplicate  this  fifth  day  of  April,  one  thousand 
nine  hundred  and  five,  by  and  between  Alfred  Black,  of  the  city  of  Ithaca, 
in  the  state  of  New  York,  of  the  first  part,  and  William  Coles,  of  the  same 
city  and  state,  of  the  second  part, 

"  WiTNKSSKTH,  that  the  said  party  of  the  first  part,  for  and  in  considera- 
tion of  the  agreement  hereinafter  contained,  to  be  performed  by  the  party  of 
the  second  part,  agrees  to  and  with  said  party  to  construct  and  fmish  in  a  good, 
substantial,  and  workmanlike  manner  on  the  lot  belonging  to  the  party  of  the 
second  part,  and  known  as  No.  1 5  in  Prospect  Street  in  the  city  of  Ithaca,  N.  Y., 
one  frame  building  in  accordance  with  the  plans  and  specifications  hereto  an- 
nexed, of  good,  substantial  materials,  on  or  before  the  fifteenth  day  of  November 
next.  And  the  party  of  the  second  part,  in  consideration  thereof,  agrees  to  pay  to 
the  said  party  of  the  first  part  for  the  same  the  sum  of  five  thousand  dollars, 
lawful  money  of  the  United  States,  as  follows  :  the  sum  of  one  thousand  dollars 
when  the  foundations  are  completed  ;  the  sum  of  one  thousand  dollars  when 
the  frame  or  superstructure  is  inclosed  ;  the  sum  of  one  thousand  dollars  when 
the  structure  is  plastered ;  and  the  balance  of  two  thousand  dollars  when  the 
building  is  fully  completed  according  to  the  plans  and  specifications. 

"  And  the  party  of  the  first  part  further  agrees  that  in  case  of  his  failure 
to  complete  the  work  by  the  date  fixed  he  will  pay  to  the  party  of  the  second 
part  as  liquidated  damages,  and  not  as  a  penalty,  ten  dollars  for  each  and 
every  day  the  full  completion  of  his  contract  is  delayed  beyond  that  date. 

"  In  Witness  Whereof,  the  parties  to  these  presents  have  hereunto 
set  their  hands  the  day  and  year  first  above  mentioned. 

Alfred  Black 
William  Coles  " 

If  the  signatures  are  to  be  witnessed,  add  at  the  left  "  Signed  in  the 
presence  of,"  and  have  the  witness  write  his  name  beneath  this  phrase.  If 
there  is  a  witness,  he  must  be  produced  in  court  in  order  to  prove  the  sig- 
natures, or  his  absence  must  be  satisfactorily  accounted  for.  If  there  is  no 
witness,  then  other  evidence,  as  the  testimony  of  the  other  party,  the  proof 
of  handwriting,  etc.,  may  be  resorted  to  in  order  to  prove  the  signature  in 
question.  If  a  seal  is  used,  the  final  clause  should  read,  "  In  witness  whereof, 
the  parties  to  these  presents  have  hereunto  set  their  hands  and  seals  the  day 
and  year  first  above  written  "  (see  sect.  23  ante  as  to  the  effect  of  a  seal). 

If  the  signature  of  a  party  is  to  be  affixed  by  his  agent,  the  form  should 
be  "John  Doe,  by  Andrew  Bright,  his  agent."  The  use  of  the  word  "by" 
is  very  important.  The  signature  "John  Doe,  Andrew  Bright,  Agent,"  might 
make  Bright  a  party  (see  sect.  131  post). 

If  someone  (A.  B.)  is  to  guaranty  the  performance  by  the  party  of  the  first 
part  above,  and  if  the  guaranty  is  given  at  the  time  the  contract  is  made, 
there  may  be  written  below  the  signatures  the  following: 


§31]  REVIEW  QUESTIONS  AND  PROBLEMS  39 

"  In  consideration  of  the  agreement  above  made  by  the  party  of  the  second 
part,  I  do  hereby  guaranty  to  the  said  party  that  the  above-named  Alfred 
Black  will  well  and  faithfully  perform  everything  by  the  foregoing  agreement 
on  his  part  to  be  performed,  at  the  times  and  in  the  manner  above  provided. 

A.  B." 

If  the  guaranty  is  made  subsequent  to  the  contract  to  be  guarantied,  it 
will  require  a  new  consideration,  and  this  should  be  expressed  in  the  written 
guaranty  —  for  example,  "In  consideration  of  one  dollar  to  me  paid  by  William 
Coles,  the  receipt  whereof  is  hereby  acknowledged,  I  do  hereby  guaranty,  etc." 
(see  sect.  8S  />osf). 

A  simpler  form  of  contract  would  be  as  follows : 

"  A.  B.  and  C.  D.  do  hereby  mutually  agree  as  follows :  A.  B.  to  [sia/e 
■what  A.  B.  projfiisesy,  C.  D.  to  \_state  what  C.  D,  protnises\  .    j, 

Ithaca,  N.Y.,  Jan.  5,  1905.  C.  D." 

But  the  more  formal  phraseolog}'  is  safer  to  use  in  order  to  make  clear 
that  the  promises  are  mutually  dependent  and  indivisible  (see  sect.  ■^()  post). 

A  contract  may  be  assigned  in  the  following  form : 

"  For  value  received,  I  hereby  assign  to  E.  F.  the  within  contract. 

Ithaca,  N.Y.,  June  7,  1905.  A.  B." 

REVIEW  QUESTIONS  AND  PROBLEMS 

Sectio.n  10.  Define  contract.  Distinguish  agreement  from  contract. 
Illustrate.  Distinguish  affirmative  and  negative  contracts.  How  many  parties 
to  a  contract .''    What  is  a  novation  ?    Illustrate. 

Problem  i.  B  in  a  spirit  of  frolic  and  banter  offers  C  $300  for  a  watch 
worth  Si 5.  C  in  the  same  spirit  accepts,  takes  B's  check  for  $300  on  a  bank 
in  which  he  has  no  deposit,  and  delivers  the  watch  to  B.  C  presents  the 
check,  and,  when  it  is  dishonored,  brings  an  action  against  B  for  the  $300. 
B  sets  up  the  above  facts  and  offers  to  return  the  watch.  Should  C  recover 
the  $300  against  B  ? 

11.  Name  the  essentials  of  an  enforceable  contract. 

12.  What  is  the  meaning  of  agreement.-'  How  is  it  determined  when  an 
agreement  has  been  reached.''    Why  must  its  terms  be  definite? 

Problem  2.  B  offers  to  sell  his  horse  to  C  for  ?r65.  C  understands  B  to  say 
$65,  and  replies,  "  I  '11  give  fifty-five."  B  understands  that  C  means  "  one  fifty- 
five,"  having  dropped  the  "  one,"  as  is  not  unusual  among  traders.  B  replies, 
"  Sixty-five  is  the  price."    C  then  says,  "  I  '11  take  him."    Is  there  a  contract? 

Problem  J.  B  agrees  to  give  his  niece  C  100  acres  of  land  if  she  will  live 
with  him  until  her  marriage  and  act  as  his  housekeeper.  C  accepts  and  performs 
her  part  of  the  agreement.  B  refuses  to  convey  to  her  any  land.  C  sues  for 
breach  of  the  contract.    Is  there  an  enforceable  contract?    Has  C  any  remedy? 


40  FORMATION  OF  CONTRACTS  [Ch.  II 

Problem  4.  B  hires  C  and  agrees  to  pay  him  "  good  wages,"  but  after- 
wards refuses  to  give  him  any  work.  C  sues  for  damages  for  breach  of 
contract.    Result } 

13.  Name  three  classes  of  agreements.  Illustrate.  Point  out  the  different 
classes  in  sect.  10,  Ex.  6. 

14.  How  do  agreements  originate.'*  Define  offer.  Define  acceptance.  What 
forms  do  offer  and  acceptance  take.-*  Explain  bilateral  executory  contract; 
unilateral  executory  contract;  executed  contract.  Define  express  promise; 
implied  promise. 

1.  Must  the  offer  be  communicated.?  To  whom?  When  is  the  offer  of  a 
reward  published  in  a  newspaper  communicated?  When  one  purchases  a 
railway  ticket,  who  makes  the  offer? 

Probloii  5.  C  is  on  a  train  and  B's  agent  comes  through  to  take  orders 
for  the  delivery  of  baggage.  C  gives  the  agent  a  check  for  his  trunk  and 
receives  a  receipt  containing  a  notice  that  B  will  not  be  liable  in  case  of  loss 
to  an  amount  exceeding  $100.  C  does  not  read  the  receipt  or  know  of  its 
contents.    The  baggage  is  lost.    Is  C  limited  to  a  recovery  of  $100? 

2.  How  may  the  acceptance  be  communicated?  Are  words  necessary? 
Must  it  actually  reach  the  offeror?  Is  mental  acceptance  sufficient?  When 
an  offer  is  made  by  mail,  when  is  the  acceptance  complete  ? 

Problem  6.  B  asked  C  for  an  estimate  of  the  cost  of  fitting  up  an  office. 
C  made  the  estimate  (not  an  offer).  B  then  wrote  C  saying  that  if  C  would 
do  the  work  within  two  weeks,  he  might  begin  at  once.  No  answer  was 
received.  The  next  day  B  countermanded  the  order.  Meanwhile  C  purchased 
material  and  began  to  work  upon  it  at  his  shop.  C  now  sues  B  for  breach 
of  contract.    Was  there  a  completed  contract? 

Problem  7.  C  has  supplied  B  with  eelskins  used  in  his  business.  He  has 
sent  them  without  a  specific  order,  and  B  has  kept  them  and  paid  for  them. 
C  sends  B  a  quantity  on  April  2.  B  keeps  them  for  some  months  unpacked. 
They  are  then  destroyed  by  fire.    Is  B  liable  to  C  for  the  price? 

3.  What  is  the  effect  of  a  qualified  acceptance?    Illustrate. 

Problem  8.  B  offers  C  2000  tons  of  iron  rails  at  so  much  per  ton.  C  tele- 
graphs, "  Send  me  1200  tons  iron  rails  as  per  offer."  B  telegraphs  a  refusal  to 
fill  the  order.  C  then  telegraphs,  "  Send  me  2000  tons  iron  rails  as  per  offer." 
B  again  refuses  to  fill  the  order.   C  then  sues  B  for  breach  of  contract.    Result? 

4.  What  control  has  the  offeror  over  the  offer  before  acceptance  ?  Same 
question  (a)  when  offer  is  made  under  seal  and  {b)  when  offeree  pays  to  have 
time  to  accept? 

Problem  g.  C  is  offering  goods  at  auction.  B  bids  $100  for  the  lot,  but 
retracts  the  bid  before  the  hammer  falls.  C  refuses  to  accept  the  recall  of  the 
bid  and  knocks  down  the  goods  to  B,  who  refuses  to  take  them.  C  sues  B. 
Is  there  a  contract? 


REVIEW  QUESTIONS  AND  PROBLEMS  41 

Probletn  10.  B  sent  a  letter  to  C  saying :  "  We  are  able  to  offer  salt  at 
85  cents  a  barrel.  Shall  be  pleased  to  receive  orders."  C  at  once  ordered 
2000  barrels  at  that  price.  B  refused  to  fill  the  order,  as  salt  had  gone  up 
in  price.    C  sues  B  for  breach  of  contract.    Result.'' 

5.  Suppose  the  offeree  accepts  after  the  offeror  has  revoked  but  before 
the  offeree  knows  of  the  revocation  ? 

6.  How  does  an  offer  lapse .''  What  is  the  effect,  upon  an  unaccepted  offer, 
of  the  death  of  the  offeror  or  of  the  offeree .'' 

15.  Who  is  an  infant?  When  is  he  of  age.''  Which  of  his  contracts  are 
binding  during  infancy?  Which  are  binding  after  he  is  of  age?  What  are 
necessaries?    What  is  ratification? 

Problem  11.  On  August  10,  at  8  a.m.,  B  bought  of  C  a  bicycle  for  $50. 
B's  twenty-first  birthday  was  on  August  11,  and  it  was  proved  that  he  was 
born  at  10  P.M.  of  that  day.  C  sues  B  for  the  agreed  price.  B  seeks  to 
disaffirm  the  contract  and  pleads  that  it  was  made  during  infancy.    Result? 

Problem  12.  B,  a  student  of  eighteen  years,  engaged  a  room  of  C  for 
forty  weeks,  at  $2  a  week,  payable  weekly.  At  the  end  of  ten  weeks  he 
left  the  room,  and  C  was  unable  to  secure  another  lodger.  C  sues  B  for  §80. 
B  pleads  infancy.    How  much  may  C  recover? 

Problem  jj.  B,  while  an  infant,  bought  jewelry  (not  necessary)  of  C.  After 
B  became  of  age  he  acknowledged  the  debt  and  said  he  would  pay  it  as  soon 
as  he  had  the  means.    Is  B  liable  to  C  ? 

Problem  14.  B,  an  infant,  buys  a  horse  of  C.  After  B  is  twenty-one  he 
sells  the  horse  to  X.    C  sues  B  for  the  price  of  the  horse.    Can  B  succeed  ? 

Problem  /j.  C,  an  infant,  sells  B  a  horse.  Before  C  is  twenty-one  he 
brings  an  action  to  recover  the  horse  from  B.  Will  such  an  action  lie  during 
C's  minority? 

16.  What  contracts  of  an  insane  person  are  voidable  ?  What  are  binding  ? 
Same  questions  as  to  idiots  ;  intoxicated  persons. 

17.  What  was  the  common-law  rule  as  to  married  women's  contracts? 
What  is  a  void  contract?  (Are  an  infant's  contracts  void?)  How  do  statutes 
change  the  common  law  as  to  married  women's  contracts? 

18.  What  contracts  require  a  consideration?  What  instruments  have 
presumptive  consideration?    What  is  the  effect  of  a  seal  at  common  law? 

Problem  16.  C  voluntarily  supplied  necessary  articles  to  B's  father,  who 
was  old  and  poor.  B  afterwards  promised  C  to  pay  for  them.  C  now  sues  B 
on  that  promise.    Is  B  liable? 

19.  Must  the  consideration  equal  the  promise  in  value?  What  is  a 
valuable  con.sidcration  ?    What  is  not  ? 

Problem  17.  B  says  to  C,  "  If  you  will  take  a  trip  abroad.  1  will  pay  your 
expenses."  C  takes  the  trip,  and  now  sues  B  for  the  expense  incurred. 
Is  I',  liable? 


42  FORMA'l  ION  OF  CONTRACTS  [Cn.  II 

ProhUm  iS.  B  writes  to  C,  "If  you  will  extend  the  time  which  A  has  to 
pay  you  his  debt,  I  will  become  surety  for  A's  payment."  C  extends  the  time 
and  takes  from  A  a  new  note  on  three  months'  time.  A  docs  not  pay.  C  sues 
B.    Should  C  succeed  ? 

Prohletn  ig.  B  and  C  were  in  dispute  about  a  claim  made  by  C  upon  B 
for  an  injury  to  goods  which  B  was  carrying  for  C.  B  finally  agreed  to  give 
and  C  to  take  one  half  the  amount  C  first  claimed.  C  sues  on  B's  promise. 
B  answers  that  there  was  no  consideration  for  his  promise  because  he  (B)  was 
not  liable  at  all  to  C  for  the  injury  to  the  goods. 

Problem  20.  C  was  a  constable  in  A.  B  offered  a  reward  of  $  i  oo  for  the 
arrest  of  X  for  a  specified  crime.  C,  knowing  of  the  reward,  arrested  X  in  A, 
and  now  brings  an  action  for  the  reward.    What  objection.? 

20.  What  is  meant  by  a  past  consideration .?  Distinguish  from  an  executed 
consideration.  Illustrate.  Effect  of  previous  request?  What  is  meant  by 
waiving  a  legal  bar  to  an  action  on  a  contract  ? 

Probletn  21.  B  says  to  C,  "  If  you  will  look  up  certain  of  my  debtors,  I 
will  pay  you  what  is  right."  C  does  so.  B  then  promises  to  pay  C  $100. 
How  much  may  C  recover? 

21.  What  is  meant  by  an  illegal  consideration?    Illustrate. 

22.  What  is  the  Statute  of  Frauds?  Object?  When  first  enacted?  What 
sections  deal  with  contracts?  State  the  provisions  of  the  fourth  section.  Of 
what  may  the  memorandum  consist?  What  must  it  contain?  State  the  pro- 
visions of  the  seventeenth  section.  In  what  three  ways  may  this  section  be 
satisfied?  Is  the  seventeenth  section  in  force  in  your  state?  If  so,  what 
contracts  for  personalty  are  within  the  statute? 

Problem  22.  A  memorandum  of  sale  made  by  an  auctioneer  read  as 
follows : 

"Oct.  9,  1866.  This  day  sold  B's  house  and  land  on  Bartlett  Street  in 
Lewiston;   was  struck  down  to  C  for  $1200,  one  third  down. 

D.  E.,  Auctioneer  " 

C  sues  B,  alleging  that  he  (C)  was  to  pay  one  third  down,  one  third  in  one 
year,  and  one  third  in  two  years,  and  that  B  refused  to  carry  out  the  comtract. 
B  pleads  the  Statute  of  Frauds.    Is'  this  a  good  defense? 

Problem  23.  B  sells  C  by  parol  two  standing  trees  for  $10.  Afterwards  B 
refuses  to  allow  C  to  cut  the  trees.  C  sues  B  for  breach  of  contract.  B  pleads 
the  Statute  of  Frauds.    Result? 

Problem  24.  B.  Ry.  and  C  agree  orally  that  if  C  will  grade  and  lay  a  side- 
track, or  switch,  the  Ry.  will  maintain  the  switch  for  C's  benefit  for  shipping 
purposes  as  long  as  C  may  need  it.  C  does  his  part.  The  B.  Ry.  refuses  to 
perform  its  part.  C  brings  an  action  for  damages.  The  Ry.  pleads  the 
Statute  of  Frauds.    Which  provision?    Result? 


REVIEW  QUESTIONS  AND  PROBLEMS  43 

23.  What  is  a  seal?  What  is  a  sealed  contract?  What  is  the  effect  of  a 
seal  ?    What  statutorj-  changes  in  the  effect  of  a  seal  ? 

24.  What  contracts  are  usually  declared  by  statute  to  be  illegal?  What  is 
the  effect  of  prohibiting  an  act  ?  What  is  the  effect  of  affixing  a  penalty  to  the 
doing  of  an  act  ? 

Problem  2j.  A  statute  prohibits  any  work,  labor,  or  business  on  Sunday. 
C  agrees  with  B  to  procure  advertisements  to  be  published  in  B's  Sunday 
newspaper.    Is  this  contract  illegal  ? 

Problem  26.  Under  a  similar  statute  B  makes  and  delivers  a  promissory 
note  to  C  on  Sunday.    May  C  enforce  the  note? 

25.  Define  wagering  contracts.  Were  they  illegal  at  common  law?  Explain 
wagers  on  the  rise  and  fall  of  the  market.  In  what  sense  are  insurance  contracts 
wagering  contracts  ? 

Problem  2j.  C,  a  broker,  sues  B,  a  customer,  for  moneys  paid  and 
expended  by  C  in  certain  stock  transactions.  It  was  understood  between  C 
and  B  that  the  purchases  and  sales  made  by  C  for  B  should  not  result  in  an 
actual  transfer  of  stocks,  but  that  in  each  case  the  contract  should  be  adjusted 
by  the  payment  of  money  by  B  in  case  the  transaction  proved  to  be  a  losing 
one,  or  to  B  in  case  it  was  a  winning  one.  C  paid  out  for  B  more  than  he 
took  in  for  him.    Can  C  recover  this  amount? 

26.  Enumerate  and  illustrate  contracts  illegal  at  common  law.  What  is  a 
contract  in  restraint  of  trade  ?   Are  all  such  contracts  illegal  ?   What  is  the  test  ? 

Problem  28.  B  had  a  claim  against  the  United  States.  C  agreed  with  B 
to  secure  an  act  of  Congress  appropriating  money  for  the  payment  of  the 
claim,  and  B  agreed  to  pay  C  25%  of  whatever  sum  Congress  might  appro- 
priate. C  secured  an  appropriation  in  favor  of  B  for  $12,000.  B  refuses  to 
pay  C,  who  then  brings  an  action  against  him  for  $3000.    Result  ? 

Problem  2g.  C  charges  B  with  embezzlement.  Upon  C's  agreeing  not  to 
prosecute  B  criminally,  the  latter  gives  C  a  promissory  note  for  the  amount. 
Is  B  liable  upon  the  note? 

27.  What  is  an  indivisible  contract?  What  is  the  effect  if  any  portion  of  it 
is  illegal?  What  is  a  divisible  contract?  What  is  the  effect  if  one  part  is 
illegal?    If  a  party  pays  money  upon  an  illegal  contract,  can  he  recover  it? 

Problem  jo.  C  deposited  $500  with  B  as  a  wager  on  a  foot  race,  knowing 
it  was  to  be  a  "  bogus  "  race,  and  intending  to  cheat  someone.  Before  the 
race  was  run,  C  became  suspicious  that  he  would  be  cheated  and  demanded 
back  his  money.  B  refused  to  give  it  back,  and  finally  paid  it  to  A,  the 
pretended  winner  of  the  race.    C  sues  B  for  the  amount.    Result? 

28.  What  is  meant  by  reality  of  consent?  What  will  prevent  reality  of 
consent?  Distinguish  between  mutual  and  unilateral  mistake.  Name  the 
classes  of  mutual  mistake.  Explain  and  illustrate  each.  Which  will  avoid  a 
contract?    When  will  unilateral  mistakes  avoid  a  contract? 


44  FORMA  riON  OF  CONTRACTS  L*^'i.  II 

Problem  jr.  Contract  of  sale  of  a  lot  of  land  on  Prospect  Street  in 
Waltham.  In  an  action  against  the  buyer  for  the  price,  he  sets  up  that  the 
land  now  tendered  him  is  on  another  Prospect  Street  than  the  one  he  had  in 
mind,  and  understood  that  the  seller  had  in  mind,  when  the  contract  was 
made.     Is  this  a  good  defense? 

Problem  J2.  C.  Ry.  prepares  a  rate  sheet  and  by  mistake  prints  the  fare 
from  A  to  D  as  $21.25  when  it  should  be  j?36.7o.  B  discovers  the  mistake 
and  takes  advantage  of  it  by  at  once  purchasing  of  a  local  agent  a  large 
number  of  tickets  at  the  printed  price.  C.  Ry.  seeks  to  enjoin  B  from  dis- 
posing of  these  tickets  and  to  compel  him  to  return  them  and  receive  back 
his  money.     Result? 

29.  Define  fraud  and  its  effect  upon  the  contract.  Distinguish  innocent 
misrepresentation.  Is  this  a  tort?  Will  it  avoid  a  contract?  When  does  a 
representation  become  a  warranty  ?  What  is  the  effect  of  a  representation  of 
opinion  ?    What  is  fraudulent  concealment  ? 

Problem  jj.  B  had  engaged  S  to  teach  school  in  District  A  in  case  she 
secured  a  certificate  by  a  certain  time.  C  applied  for  the  same  school,  and  on 
being  informed  of  the  contract  with  S,  stated  to  B  that  there  would  be  no 
examination  for  teachers  in  time  for  the  opening  of  school.  B  then  engaged 
C.  Later  S  appeared  with  the  necessary  certificate,  and  B  refused  to  allow  C 
to  teach.  C  sues  B  for  breach  of  contract,  (i)  In  case  C  knew  there  would 
be  an  examination,  can  he  recover?  (2)  In  case  C  believed  there  would  not  be 
an  examination,  can  he  recover  ? 

Problem  34.  C  sold  B  cattle,  knowing  and  concealing  the  fact  that  they 
had  Texas  fever,  a  disease  not  discoverable  by  examination.  The  cattle  died, 
and  C  sues  for  the  price.    Should  he  win  the  suit? 

30.  Define  duress.    Need  it  be  against  the  contracting  party? 

31.  What  is  undue  influence?  Distinguish  from  duress.  When  is  it 
presumed  ? 

Draw  a  contract  by  which  you  agree  to  work  for  John  Doe  as  clerk  in 
his  store  for  one  year,  with  a  vacation  of  two  weeks,  for  $10  a  week  payable 
weekly  during  the  entire  year,  and  are  to  have  at  cost  price  such  goods,  not 
exceeding  $100  in  the  aggregate,  as  you  may  choose  to  select  from  his  stock. 

Draw  a  contract  by  which  Richard  Roe  guaranties  the  faithful  performance 
of  your  part  of  the  above  contract. 

Draw  an  assignment  of  your  right  to  the  goods. 


CHAPTER  III 

OPERATION  AND  DISCHARGE  OF  CONTRACTS 

I.    Liabilities  and  Rights  of  Third  Parties 

32.  Liability  of  third  parties.  The  problem  here  is  twofold  : 
first,  whether  anyone  can  be  made  liable  upon  a  contract  who 
is  not  a  party  to  it  ;  and,  second,  whether  one  may  be  liable  for 
interfering  with  the  formation  or  performance  of  contracts. 

1.  Contracts  bind  only  the  parties  to  them.  A  person  cannot 
be  made  liable  upon  a  contract  to  which  he  was  not  a  party,  for 
agreement  lies  at  the  basis  of  all  true  contracts.  But  an  undis- 
closed principal  may  be  liable  on  a  contract  made  by  his  agent, 
although  by  its  terms  it  is  a  contract  between  the  agent  and  the 
other  party ;  this  is  an  exception  to  the  general  rule,  and  is 
treated  later  (see  sect.  129). 

Examples :  i.  A  contracts  with  B.  In  fact,  A  is  acting  for  an  undisclosed 
principal  P.    When  B  learns  this,  he  may  hold  P  liable  on  the  contract. 

2.  But  if  A,  as  above,  exceeds  the  authority  P  gave  him,  B  cannot  hold  P. 
It  is  really  P's  consent  that  A  may  make  the  contract  that  renders  P  liable. 

2.  Third  persons  may  render  themselves  liable  in  tort  by 
interfering  with  contracts,  by  inducing  one  party  to  a  contract  to 
commit  a  breach  of  it,  or  by  using  unlawful  means  to  prevent  a 
person  from  making  a  contract.  A  boycott  is  brought  about  by 
inducing  persons  not  to  deal  with  the  one  boycotted.  If  force  or 
fraud  is  used,  the  boycott  becomes  unlawful. 

Examples :  3.  A  engages  B  to  sing  at  his  theater  for  the  season.  X 
induces  B  to  break  this  contract  and  sing  at  X's  theater.  X  is  liable  to  A  for 
the  damages  caused  by  B"s  breach  of  contract. 

4.  A  is  negotiating  with  B  to  sing  at  his  theater.  '  X  falsely  tells  B  that  A 
is  insolvent  and  cannot  pay  the  salary.  B  refuses  to  contract.  X  is  liable  in 
tort  to  A  for  inducing  B,  by  false  representations,  not  to  enter  into  a  contract 
with  A. 

5.  Strikers  threaten  to  assault  workmen  who  are  seeking  their  places,  and 
thus  prevent  the  employer  from  getting  new  workmen.    The  strikers  arc  liable 

45 


46  OPERATION  OF  CONTRACTS  [Ch.  Ill 

to  the  employer  for  preventing  him  by  unlawful  means  (threats  of  violence) 
from  making  contracts  with  those  who  otherwise  would  apply.  The  strikers 
may  also  be  enjoined  from  using  unlawful  means  for  this  purpose.  If  the 
strikers  also  keep  customers  away  by  such  means,  there  is  an  unlawful  boy- 
cott of  the  employer's  business. 

33.  Rights  of  third  parties.  In  most  of  the  United  States, 
but  not  in  England,  if  a  contract  is  made  by  A  with  B  for  the 
direct  benefit  of  C,  the  latter  may  recover  upon  it,  although  A 
furnished  the  consideration  and  the  promise  of  B  was  made  to 
A.  This  is  especially  so  whenever  A  owes  C  some  duty  which 
he  is  seeking  to  discharge  by  giving  C  the  benefit  of  B's  promise. 
So  also  an  undisclosed  principal  may  sue  upon  a  contract  made 
by  his  agent  in  his  behalf. 

Examples  .•  i .  A  lends  B  money  and  B  promises  A  to  repay  it  to  C,  to 
whom  A  owes  money.  C  may  maintain  an  action  against  B  upon  the  promise 
made  for  his  benefit.  • 

2.  An  incoming  partner  promises  an  outgoing  partner  to  assume  and  pay 
the  latter's  obligations  to  the  partnership  creditors.  The  creditors  may  sue  the 
incoming  partner  upon  the  promise  made  for  their  benefit. 

3.  A  father  agrees  to  name  his  child  after  B,  in  consideration  of  B's  promise 
to  pay  the  child  $1000  when  he  is  twenty-one.  The  father  names  the  child 
after  B.  When  the  child  is  twenty-one  he  may  compel  B  to  pay  him  the 
money  so  promised. 

4.  A  contracts  with  B,  but  is  secretly  acting  for  P,  an  undisclosed  principal. 
P  may  hold  B  upon  the  contract. 

II.    Assignment  of  Contracts 

34.  Assignment  by  act  of  the  parties.  A  bilateral  contract 
creates  both  liabilities  and  rights.  The  problem  is  whether  either 
the  liabilities  or  the  rights  may  be  assigned  by  a  party  to  the 
contract  to  some  other  person. 

I.  Assignment  of  liabilities.  A  party  to  a  contract  cannot  as- 
sign or  transfer  his  liabilities  under  it.  The  other  party  has  a  right 
to  look  to  the  perso;i  with  whom  he  has  contracted.  If  the  duties 
are  not  for  purely  personal  service  or  do  not  involve  personal  confi- 
dence, one  can  assign  his  rights  and  delegate  the  performance  of  his 
duties,  but  will  remain  liable  if  they  are  not  properly  performed. 

Example  i.  A  let  a  carriage  to  B  at  a  yearly  rental  for  five  years,  and 
agreed  to  keep  it  in  repair  and  to  paint  it  every  year.    A  sold  his  business  to  C 


§  35]  ASSIGNMENT  47 

and  notified  B  that  C  would  be  answerable  for  future  repairs.  B  refused  to 
accept  C  and  returned  the  carriage.  B  is  right.  He  is  not  bound  to  look  to 
anybody  except  A  for  the  repairs.  But  nevertheless  A  could  delegate  to  C  the 
doing  of  the  necessary  work,  remaining  himself  personally  liable  for  any  negli- 
gence or  nonperformance.  If  the  work  is  artistic  work,  the  performance  of  it 
cannot  be  delegated ;  the  other  party  has  a  right  to  the  artistic  skill  of  the 
person  with  whom  he  contracted. 

2.  Assigiwiciit  of  ngJits.  The  rights  one  acquires  under  a 
contract  may  be  assigned  if  they  relate  to  money  or  property, 
but  one  cannot  assign  a  right  to  some  personal  service.  At  com- 
mon law  the  assignee  must  sue  in  the  name  of  the  assignor,  but 
statutes  now  generally  give  the  assignee  the  right  to  sue  in  his 
own  name.  The  assignee  is  subject  to  whatever  defenses  might 
have  been  set  up  against  his  assignor ;  he  gets  the  assignor's 
rights,  and  no  more. 

Examples :  2.  A  contracts  to  give  B  $100  for  B's  horse.  A  assigns  the 
contract  to  C.  Upon  tender  of  the  Jioo  C  is  entitled  to  the  horse.  So  also  B 
could  assign  the  right  to  receive  the  money. 

3.  A  contracts  to  give  B  his  note  for  $100  for  B's  horse.  A  assigns  the 
contract  to  C.  B  is  not  bound  to  take  C's  note,  nor  is  he  bound  to  deliver  the 
horse  to  C  unless  the  latter  tenders  A's  note. 

4.  C  agrees  to  work  for  D  in  D's  store  for  $30  a  month.  D  sells  the  store 
to  E  and  assigns  to  him  the  contract  with  C  for  services.  C  is  not  obliged  to 
work  for  E  under  the  contract. 

5.  F  assigns  to  H  a  contract  with  G  by  which  G  agreed  to  deliver  100 
bushels  of  oats  in  exchange  for  F's  horse.  H  sues  G  for  breach  in  refusing 
to  deliver  the  oats  after  receiving  the  horse.  G  sets  up  that  F  fraudulently 
represented  the  horse  to  be  sound  and  claims  an  offset  in  damages.  H  is 
subject  to  this  defense  precisely  as  F  would  have  been. 

35.  Negotiability  of  certain  contracts.  Contracts  contained  in 
written  instruments  that  are  negotiable,  such  as  bills  of  exchange, 
promissory  notes,  and  checks,  may  be  transferred  by  negotiation 
from  hand  to  hand  so  that  each  new  holder  may  recover  upon 
them.  Moreover,  the  transferee,  if  a  holder  for  value  and  without 
notice,  is  not  subject  to  the  personal  defenses  which  might  have 
been  set  up  against  the  transferor.  This  incident  of  negotiability 
is  a  peculiar  attribute  of  these  instruments  and  will  be  more  fully 
discussed  under  the  head  of  Negotiable  Paper. 

The  distinction  between  assignability  and  negotiability  may  be 
thus  illustrated. 


48  OPERATION  OF  CONTRACTS  [Cii.  HI 

1.  "On  demand  1  promise  to  deliver  to  John  Doe  loo  bushels  of  wheat  at 
eighty  cents  a  bushel.    Richard  Roe." 

Indorsed :  "  For  value  received,  I  hereby  assign  this  contract  to  J.  S. 
Dale.   John  Dok." 

2.  "  On  demand  I  promise  to  pay  to  the  order  of  John  Doc  one  hundred 
dollars,  value  received.    Rit  iiakd  Rok." 

Indorsed:  "Pay  to  J.  S.  Dale.   John  Dok." 

The  first  instrument  is  a  common-law  contract.  It  is  assigned 
by  the  promisee,  John  Doe,  to  J.  S.  Dale.  The  assignee.  Dale, 
may  maintain  an  action  against  the  promisor,  Richard  Roe,  in 
case  the  latter  refuses  to  deliver  the  wheat  upon  tender  of  the 
price.  At  common  law  Dale  would  have  to  sue  in  the  name  of 
the  assignor,  Doe,  and  he  would  be  subject  to  whatever  defenses 
might  have  been  set  up  had  Doe  brought  the  action  himself,  as, 
for  example,  that  there  was  mistake  or  fraud  in  the  contract. 
He  may  now  generally,  under  statutory  provisions,  sue  in  his  own 
name,  but  he  is  still  subject  to  the  same  defenses. 

The  second  instrument  is  a  negotiable  promissory  note.  It  is 
indorsed  by  the  promisee,  John  Doe,  to  J.  S.  Dale.  The  indorsee, 
Dale,  may  maintain  an  action  in  his  own  name  against  the  maker, 
Richard  Roe,  in  case  the  latter  fails  to  pay  at  maturity;  and  if 
he  gave  value  and  had  no  notice  of  any  defense,  like  mistake  or 
fraud,  he  will  not  be  subject  to  such  defense  even  though  Doe 
would  have  been  subject  to  it  if  he  had  retained  the  note  and 
brought  the  action. 

The  rules  of  negotiability  came  into  the  law  from  the  custom 
of  merchants,  and  are  peculiar  to  a  class  of  instruments  known 
as  negotiable  paper. 

36.  Assignment  by  operation  of  law.  Where  a  contracting 
party  dies,  most  contracts  which  he  might  have  assigned  during 
his  life  pass  to  his  executor  or  administrator,  who  may  sue  or 
be  sued  upon  them.  Contracts  for  personal  services  do  not  survive 
the  death  of  either  party,  and  contracts  requiring  long-continued 
operations  or  conduct  of  business  by  an  administrator  will  not  be 
deemed  to  survive. 

So  where  a  person  becomes  a  bankrupt,  his  right  to  enforce 
contract  obligations  passes  to  his  trustee  in  bankruptcy ;  but  the 
trustee  would  not  be  bound  to  enter  upon  performance  inconsistent 
with  the  purpose  of  winding  up  the  bankrupt's  affairs. 


§37]  BY  AGREEMENT  .         49 

At  common  law  a  husband,  upon  marrying,  became  entitled  to 
all  his  wife's  personal  property  and  could  enforce  her  claims 
growing  out  of  contract.  Conversely,  he  became  liable  for  her 
antenuptial  debts.  But  these  common-law  rules  have  been  al- 
most everywhere  swept  away  by  statutes  giving  married  women 
the  control  of  their  own  property  and  making  them  liable  for 
their  own  contracts. 

III.    Discharge  of  Contracts 

37.  Discharge  by  agreement,  including  performance.  An  agree- 
ment to  discharge  a  contract  may  be  made  by  the  parties  to  it 
after  it  is  created,  or  the  agreement  as  to  a  method  of  discharge 
may  be  contained  in  the  contract  itself. 

1.  Waiver  or  jrscissioji.  When  a  bilateral  contract  has  been 
concluded  and  is  a  binding  agreement,  the  parties  to  it,  by  a  new 
agreement,  may  contract  to  discharge  it.  The  consideration  is 
the  mutual  release  of  A  by  B  and  of  B  by  A  from  any  further 
liability  under  it.  If  the  contract  has  been  performed  by  A  but 
not  by  B,  A  may  release  B,  but  there  must  be  some  consideration 
for  the  release  or  it  must  be  under  seal ;  but  in  those  states 
where  the  seal  has  no  legal  effect  there  must  be  consideration 
for  the   release. 

Examples :  i.  A  agrees  to  sell  and  B  to  buy  A's  book  for  $1.  A  and  B 
then  mutually  agree  to  release  each  other.  A's  promise  to  release  B  is  the 
consideration  for  B's  promise  to  release  A,  and  7iice  versa. 

2.  A  has  delivered  the  book  to  B,  and  B  now  owes  A  $1.  A  promises  B 
not  to  claim  the  dollar,  that  is,  releases  B  from  liability.  The  promise  is  not 
enforceable;  there  is  no  consideration  for  it.  B  gives  A  fifty  cents  and  A 
releases  B  from  the  balance.  Still  there  is  no  consideration ;  a  smaller  sum  is 
not  consideration  for  a  larger.  B  gives  A  a  ten-cent  pencil  in  consideration 
of  A's  promise  to  release  him ;  the  promise  is  enforceable  and  B  is  no  longer 
liable  to  A.  A  gives  B  a  release  under  seal ;  it  is  enforceable  and  B  is  released. 
A  release  under  seal  might  be  as  follows  :  "  For  value  received,  I  hereby  release 
and  di-scharge  B.B.  from  all  claims  for  the  unpaid  portion  of  the  purchase 
price  of  X  book.  Witness  my  hand  and  seal  this  seventh  day  of  February, 
1905.    A. A.  [seal]." 

2.  Substituted  contract.  The  parties  may  by  agreement  sub- 
stitute a  new  contract  for  an  existing  one. 


50  DISCHARGE  OF  CON  TRACTS  [Cn.  in 

Examph'  3.  A  agrees  to  dig  a  well  for  B  for  i.^o.  A  complains  that  he 
will  lose  money,  owing  to  the  presence  of  rock  which  had  not  been  contem- 
plated. It  is  agreed  that  A  shall  dig  the  well  and  that  B  shall  pay  him  ^^75. 
This  may  be  treated  as  a  substituted  contract  and  thus  escape  the  difficulties 
mentioned  in  sect.  19,  Ex.  4,  ante.  ^ 

3.  Provisions  for  discharge.  The  contract  itself  may  contain 
certain  provisions  looking  to  a  discharge  under  specified  contin- 
gencies, as,  for  example,  an  agreement  that  either  party  may  ter- 
minate it  upon  thirty  days'  notice.  Insurance  contracts  or  policies 
provide  for  a  discharge  in  case  of  increase  of  risk,  as  in  case  the 
property  remains  vacant  and  unoccupied  for  more  than  ten  days, 
and  the  like. 

4.  Discharge  by  performance.  If  in  accordance  with  the  terms 
of  the  contract  either  party  performs  what  he  has  promised  to 
perform,  he  is  discharged.  If  both  perform,  the  contract  is  dis- 
charged, or  executed.  Tender  is  an  attempted  performance ;  if  it 
is  accepted,  it  discharges  the  one  making  it ;  if  it  is  refused,  it 
discharges  him  unless  his  contract  is  for  the  payment  of  money, 
in  which  case  he  is  still  liable  on  his  debt  but  may  plead  the 
tender  against  a  claim  for  interest  or  the  costs  of  an  action.  A 
tender  of  money,  to  be  technically  good,  must  be  of  the  exact 
amount  due  and  in  legal-tender  money. 

Legal-tender  money  in  payment  of  private  debts  consists  of  any  gold  coin, 
silver  dollars,  United  States  notes  (greenbacks),  and  United  States  Treasury 
notes,  to  any  amount;  fractional  silver  coins  to  the  amount  of  ten  dollars; 
nickel  and  copper  coins  to  the  amount  of  twenty-five  cents.  Gold  and  silver 
certificates  and  national  bank  notes  are  not  legal-tender  money,  but  are  ordi- 
narily received  in  payment  of  debts  without  objection. 

A  tender  of  a  check  or  note  of  a  debtor  need  not  be  accepted  in  place  of 
money.  If  it  is  accepted,  it  is  (in  most  states)  regarded  as  merely  a  conditional 
payment  unless  otherwise  expressly  stipulated.  If  the  check  or  note  is  not 
paid,  the  creditor  can  either  sue  upon  it  or,  by  returning  it,  sue  upon  the 
original  claim  for  which  it  was  given.  But  if  the  creditor  takes  the  note  of 
some  third  person,  which  is  the  property  of  the  debtor,  it  is  regarded  pre- 
sumptively as  payment,  just  as  if  he  had  taken  a  horse  or  other  corporeal 
chattel  owned  by  the  debtor. 

Before  a  party  to  a  contract  can  be  said  to  have  performed,  he 
must  have  fully  and  exactly  done  what  he  promised.  But  in  con- 
tracts for  building  or  executing  work  with  many  specifications  and 


§3S]  BY  IMPOSSIBILITY  51 

details  a  deviation  that  is  slight  and  not  willful  may  be  overlooked 
on  the  doctrine  of  substantial  performance.  The  contractor,  while 
he  may  recover  upon  such  substantial  performance,  must  deduct 
from  his  recovery  the  amount  the  other  party  is  damaged  by  the 
deviation.  A  deviation  which  is  more  than  slight  or  trivial,  or 
which  is  willful,  will  defeat  a  recovery  because  it  is  not  regarded 
as  performance,  and  the  contractor  is  not  therefore  discharged 
from  his  obligation. 

Exa?nple  4.  A  agrees  to  build  a  house  for  B  for  $11,700.  He  has  fully 
completed  it  according  to  specifications,  except  that  there  are  some  slight 
defects  in  the  plastering.  This  is  substantial  performance,  and  A  may  recover 
the  contract  price  less  an  offset  for  the  defect,  which  was  in  this  case  held  to 
be  $200.  But  if  the  deviation  was  willful  or  excessive,  A  could  not  recover. 
One  court  says :  "  It  may  be  harsh  doctrine  to  hold  that  a  man  who  has  built 
a  house  shall  have  no  pay  for  it,  but  the  fault  is  with  the  one  who  voluntarily 
violates  his  contract." 

If  one  agrees  to  perform  to  the  satisfaction  of  another,  and  the 
matter  is  one  of  personal  taste,  he  cannot  recover  until  the  other 
is  satisfied.  But  if  it  is  a  matter  which  is  not  one  of  mere  personal 
taste,  and  the  work  would  be  lost  if  it  were  not  accepted,  the 
other  must  be  satisfied  when  he  ought  reasonably  to  be  satisfied. 

Examples  :  5.  A  agrees  to  paint  the  picture  of  B's  wife  to  B's  satisfaction. 
B  is  not  pleased  with  it.  He  is  not  obliged  to  take  it.  A  has  not  performed 
his  contract. 

6.  A  agrees  to  put  in  boilers  in  B's  factory  to  B's  satisfaction.  A  puts  in 
the  boilers.  B  is  not  satisfied.  But  if  a  reasonable  man  would  say  B  should 
be  satisfied,  A  has  fulfilled  his  contract  and  B  is  liable. 

38.  Discharge  by  impossibility  of  performance.  A  contract  is 
not  created  if  an  impossibility  exists  at  the  time  it  is  made.  In 
only  the  excepted  cases  will  subsequent  impossibility  discharge 
a  contract, 

I.  Prior  ivipossihility.  If  a  physical  or  legal  impossibility  exists 
when  the  contract  is  supposed  to  be  made,  there  is  no  contract, 
because  the  promise  to  do  an  impossible  act  is  not  a  real  con- 
sideration for  the  counter  promise  or  act;  for  example,  if  the 
subject  matter  does  not  exist  when  the  contract  is  supposed  to  be 
made,  the  contract  is  ineffective,  because  there  is  no  subject  matter 
upon  which  it  can  operate. 


52  DISCHARGE  OF  CONTRACTS  [Cn.Ul 

2.  Subsrqitnit  ini/^ossilulity.  If  an  unforeseen  difficulty  arises 
subseiiucnt  to  the  formation  of  the  contract,  it  will  not,  save  in 
the  cases  enumerated,  discharge  the  contract. 

Exatnplc  i.  A  agrees  to  sell  and  deliver  to  B  a  quantity  of  beans  to  be 
raised  by  A.  A's  crop  is  destroyed  by  frost.  A  is  liable  for  a  breach  of  con- 
tract, since,  although  he  cannot  deliver  beans  from  his  own  land,  he  can  procure 
them  elsewhere,  and  there  is  not,  therefore,  a  real  impossibility.-  If,  however, 
it  had  been  specified  that  A  was  to  deliver  the  beans  grown  in  a  particular 
field,  and  the  crop  in  that  field  had  been  destroyed,  there  would  have  been  an 
impossibility  due  to  the  destruction  of  the  subject  matter. 

The  following  cases  of  impossibility  arising  subsequent  to  the 
formation  of  the  contract  will  discharge  the  contract. 

a.  Legal  impossibility.  If  the  impossibility  is  created  by 
a  change  in  the  laws,  or  by  an  act  of  law,  the ,  promisor  is 
discharged. 

Examples :  2.  A  leases  a  wooden  building  to  B  and  agrees,  in  case  it 
burns,  to  rebuild  it.  It  burns  and  B  demands  that  it  be  rebuilt.  A  defends 
upon  the  ground  that,  since  the  contract  was  made,  the  city  by  ordinance  has 
forbidden  the  erection  of  woodep  buildings.  The  defense  is  good.  A  is  not 
obliged  to  build  except  in  wood,  and  the  law  p'^events  him  from  building  in 
that  material. 

3.  A  agrees  to  work  for  B  for  three  months.  At  the  end  of  a  month  A  is 
arrested  and  imprisoned.  His  contract  is  discharged,  since  the  law  by  restrain- 
ing him  has  made  it  impossible  for  him  to  perform. 

/;.  Destruction  of  the  subject  matter  of  the  contract.  Where 
the  existence  of  a  specific  thing  is  essential  to  performance,  the 
contract  is  discharged  if  the  thing  is  destroyed  through  no  fault 
of  the  parties. 

Examples :  4.  A  agrees  to  let  B  occupy  a  hall  for  public  entertainments. 
Before  the  time  for  occupation  arrives,  the  hall  is  destroyed  by  fire.  The  con- 
•  tract  is  discharged. 

5.  A  sells  B  a  buggy  and  agrees  to  repaint  it  and  deliver  it  in  thirty  days. 
Before  the  work  is  finished,  the  buggy  is  destroyed  by  fire.  The  contract  is 
discharged.  Neither  party  has  any  action  against  the  other.  (If  the  buggy 
had  been  in  a  deliverable  condition,  the  title  would  have  passed  to  B  at  once, 
and  he  would  have  been  obliged  to  pay  the  agreed  price,  although  he  had  left 
the  buggy  in  A's  hands.   This  is  more  fully  explained  under  the  head  of  Sales.) 

6.  When  work  is  to  be  done  by  A  upon  an  article  belonging  to  B,  the 
destruction  of  the  article  discharges  the  contract,  but  A  may  recover  for  the 
work  performed  upon  it  before  its  destruction. 


§39]  BY   BREACH  53 

7.  One  may  contract  against  loss  or  destruction.  For  example,  A  hires  a 
boat  and  contracts  that  in  case  of  loss  he  shall  pay  a  specified  sum.  The  boat 
is  lost  in  a  storm  without  A's  fault.    A  is  bound  to  pay  as  agreed. 

c.  Death  or  disability  in  the  case  of  cojitract  for  personal  serv- 
ices. If  the  contract  is  for  personal  services,  the  death  or  in- 
capacity of  the  one  who  is  to  perform  such  services  will  discharge 
the  contract. 

Examples:  8.  A  musician  contracts  to  play  at  a  theater.  Owing  to  illness 
he  is  unable  to  do  so.  The  theater  manager  sues  for  damages  for  breach. 
He  cannot  recov^er.  The  illness  and  consequent  incapacity  of  the  musician 
discharge  the  contract. 

g.  An  unforeseen  peril,  as  the  prevalence  of  a  dangerous  contagious 
disease,  may  operate  to  discharge  a  contract  for  personal  services  within  the 
infected  district. 

ID.  The  death  of  a  master  or  of  a  servant  discharges  the  contract  as 
between  the  survivor  and  the  executor  or  administrator  of  the  deceased 
person. 

39.  Discharge  by  breach.  A  contract  may  be  indivisible  or 
divisible,  and  the  promises  may  be  mutually  dependent  or  may 
be  independent. 

1.  Where  the  promises  on  each  side  are  mutually  dependent 
and  the  contract  is  an  indivisible  one,  a  breach  of  performance 
by  one  party  will  discharge  the  other  from  performance  and  will 
give  that  other  an  action  for  damages  against  the  one  in  default. 
A  positive  assertion  by  one  party,  prior  to  the  time  fixed  for  per- 
formance, that  he  will  not  perform,  is  an  anticipatory  breach  and 
in  some  states  gives  the  other  party  an  immediate  right  of  action. 
If  one  party  tells  the  other  to  stop  performance,  the  latter  cannot 
by  going  on  add  to  the  damages  for  the  breach. 

Example  1.  A  agrees  to  sell  a  horse  to  B  for  $100.  A  refuses  to  deliver 
the  horse  and  receive  the  purchase  price.  B  is  discharged  from  any  further 
obligation ;  he  is  not  bound  to  receive  the  horse  in  case  A  should  afterwards 
tender  it,  or  to  pay  anything  to  A ;  and  he  may  maintain  an  action  for 
damages  against  A  for  the  refusal  to  deliver  when  performance  was  due. 

2.  If,  however,  the  contract  is  a  divisible  one,  or  the  transac- 
tion is  made  up  really  of  a  scries  of  contracts,  then  the  breach  of 
one  part  will  not  discharge  the  other  parts.  The  difficulty  in  these 
cases  is  in  determining  whether  a  contract  is  divisible  or  indivisible. 


54  DISCHARGE  IW   BREACH  [Ch.  Ill 

Example  i.  A  contracts  to  sell  B  1200  tons  of  coal  in  twelve  monthly 
installments  of  100  tons.  The  English  court  held  this  to  be  a  divisible  con- 
tract, and  that  a  breach  in  performance  as  to  one  installment  would  not  dis- 
charge the  contract  as  to  the  remaining  installments.  The  Supreme  Court  of 
the  United  States  held  such  a  contract  to  be  an  indivisible  one  for  the  full 
amount  specified,  and  that  a  breach  as  to  any  installment  would  discharge  the 
entire  contract.  Cienerally  in  the  United  States  such  contracts  are  regarded 
as  indivisible. 

3.  Sometimes  promises  are  not  mutually  dependent,  and  in 
such  a  case  a  failure  of  performance  on  one  side  may  not  dis- 
charge a  promise  on  the  other. 

Exa»iplc  3.  A  agrees  to  pay  a  certain  rent  for  B's  house,  and  B  agrees  to 
allow  A  to  occupy  the  house  for  one  year  and  to  give  A  the  option  to  renew  the 
lease  for  a  second  year.  A  falls  in  arrears  upon  his  rent  and  B  refuses  to  renew 
the  lease.  It  is  held  that  the  covenant  to  renew  is  independent  of  the  promise 
to  pay  the  rent,  and  therefore  B  is  not  discharged  from  the  promise  to  renew 
because  of  A's  breach  of  the  promise  to  pay.  These  cases  are  not  very  com- 
mon, and  the  construction  is  so  technical  as  to  be  chiefly  the  business  of  lawyers. 

4.  A  warranty  is  a  subsidiary  promise  attached  commonly  to  a 
contract  of  sale.  The  breach  of  the  warranty  gives  the  buyer,  under 
the  Sales  Act,  the  option  of  bringing  an  action  for  damages  or 
of  rescinding  the  contract. 

Example  4.  A  sells  B  a  horse  and  innocently  warrants  it  to  be  sound. 
After  B  has  taken  the  horse,  he  discovers  that  it  is  unsound,  and  attempts  to 
compel  A  to  take  it  back  and  repay  the  purchase  money.  Some  courts  hold 
that  this  cannot  be  done  and  that  B's  only  remedy  is  an  action  for  damages 
for  the  breach  of  the  warranty ;  but  in  the  Sales  Act  states  and  some  other 
states  B  is  allowed  to  rescind  (see  sect.  57  post). 

40.  Remedies  for  breach  of  contract.  A  breach  of  contract  may 
be  of  a  vital  or  a  nonvital  term.  Whether  a  given  term  is  vital  or 
nonvital  is  a  question  of  fact  for  the  construction  of  the  court. 
A  vital  term  is  one  of  such  importance  that  it  goes  to  the  life  of 
the  contract.  In  case  a  vital  term  in  a  contract  is  broken  by  one 
party  to  it,  these  results  follow  : 

1.  The  other  party  is  exonerated  from  further  performance  on 
his  part ; 

2.  He  has  an  action  for  breach  of  the  contract,  in  which  he 
may  recover  as  damages  the  contract  price  of  whatever  he  has 
delivered  or  done,  and  also  for  any  loss  sustained  by  being  pre- 
vented from  completing  the  contract ;  or, 


§40]  REMEDIES  FOR  BREACH  55 

3.  By  treating  the  contract  as  entirely  abandoned,  he  may, 
if  he  chooses,  recover  the  value  of  whatever  he  may  have  him- 
self already  performed ;  that  is,  he  may  proceed  upon  an  implied 
promise  to  pay  a  reasonable  price  or  compensation. 

Examples :  I.  A  sells  10,000  feet  of  lumber  to  B  at  $20  a  thousand  feet. 
A  delivers  4000  feet,  when  B  refuses  to  receive  the  remainder.  A  is  not 
bound  to  deliver  or  tender  any  more.  A  may  sue  for  breach  of  contract  and 
recover  §80  (the  contract  price  of  that  delivered) //;^j'  the  profit  he  would  have 
made  upon  the  remaining  6000  feet,  which,  assuming  that  the  lumber  cost  A  $  1 5 
a  thousand  and  is  now  worth  in  the  market  only  $153  thousand,  would  be  $30. 

2.  Or,  if  A  chooses  to  disregard  the  express  contract,  he  may  sue  as  upon 
an  implied  contract  and  recover  the  market  value  of  the  lumber  actually  deliv- 
ered. Assuming  that  this  is  5  2  5  a  thousand,  A  could  recover  $100;  but  he  could 
not  recover  for  any  loss  of  profits  upon  the  portion  undelivered.  In  case  A 
has  contracted  to  sell  this  lumber  to  B  at  too  low  a  price,  this  alternative 
would  be  preferable. 

3.  A  buys  a  quantity  of  turnip  seed  of  B,  who  represents  the  seed  to  be 
from  a  particular  variety  of  turnips  suitable  for  early  market.  A  plants  the 
seed,  and  the  turnips  raised  from  them  are  of  a  late  variety,  fit  only  for  catde. 
A  niay  recover  as  damages  the  difference  between  the  market  value  of  the 
crop  he  raised  and  that  of  the  crop  he  might  have  raised  had  the  seed  been 
as  represented. 

If  the  breach  is  of  a  nonvital  term,  the  other  party  is  not 
exonerated,  but  merely  has  a  right  of  action  for  such  damages 
as  he  has  sustained  by  reason  of  the  breach  of  the  particular 
nonvital   term. 

In  certain  classes  of  cases,  where  damages  would  be  an  inade- 
quate remedy,  the  injured  party  may  obtain  from  an  equity  court 
an  order  that  the  other  party  specifically  perform  his  promise. 
Contracts  for  the  conveyance  of  land  are  thus  specifically  enforced, 
and  contracts  for  the  transfer  of  chattels  may  be  specifically  en- 
forced if  the  chattel  is  one,  like  a  patented  article,  which  cannot 
be  procured  elsewhere  than  of  the  vendor. 

Actions  for  the  breach  of  contracts  must  be  brought  within  the 
time  fixed  by  the  Statute  of  Limitations.  In  case  of  simple  con- 
tracts this  is  usually  from  three  to  six  years,  and  in  the  case  of 
scaled  contracts,  from  ten  to  twenty  years.  The  statutes  differ 
somewhat  in  the  different  states.  When  more  than  the  prescribed 
time  has  elapsed  since  the  breach,  the  contract  or  right  of  action 
upon  it  is  .said  to  be  "outlawed,"  that  is,  barred  by  the  .statute. 


56  DISCHARGE  OF  CONTRACTS  [Ch.  Ill 

But  a  debt  may  be  revived  by  a  new  promise  to  pay  it  after  it  is 
barred  by  the  Statute  of  Limitations,  although  nearly  all  the  states 
now  require  such  a  promise  to  be  in  writing.  A  part  payment 
after  the  debt  is  barred  will  also  revive  the  whole  claim. 


IV.   Discharge  in  Bankruptcy 

41.  Insolvency  laws  not  discharging  debtor.  At  common  law 
debtors  could  be  imprisoned  for  debt,  and  such  imprisonment 
might  be  of  indefinite  duration.  It  was  not  until  1759  that  Parlia- 
ment passed  a  general  and  comprehensive  act  for  their  relief. 
This  act  provided  that  prisoners  in  custody  for  debts  under  ;^ioo 
(afterwards  extended  to  ?{^200)  might  secure  their  release  by  mak- 
ing an  assignment  of  all  their  property,  with  some  trifling  excep- 
tions, for  the  benefit  of  their  creditors ;  the  debtor,  however,  was 
not  discharged  from  civil  liability  for  the  unpaid  portion  of  his 
debts.  This  was  the  origin  of  insolvency  laws  under  which,  after 
the  abolition  of  imprisonment  for  debt,  insolvent  debtors  continued 
to  make  assignments  for  the  benefit  of  creditors  in  order  that  all 
might  share  pro  rata  in  the  available  assets.  These  laws  were 
extended  in  England  and  in  some  of  our  states  so  as  to  enable 
creditors  to  compel  an  insolvent  to  make  an  assignment  of  his 
property  for  their  benefit  and  to  give  the  debtor  a  discharge 
from  further  liability.  When  they  reach  this  point,  they  are 
indistinguishable  from  bankruptcy  laws. 

42.  Bankruptcy  laws  discharging  debtor.  Bankruptcy  laws  are 
older  than  insolvency  laws,  but  were  originally  applied  only  to 
traders  or  persons  in  mercantile  pursuits.  They  were  framed  to 
enable  creditors  to  compel  a  bankrupt  trader  to  turn  over  his 
property  for  their  benefit.  They  were  extended  for  the  benefit  of 
the  trader,  so  that,  upon  turning  over  all  his  property  for  the  pay- 
ment of  his  debts,  the  bankrupt  became  discharged  from  further 
liability  and  could  begin  business  again  free  from  the  burden  of 
former  debts.  They  were  further  extended  so  as  to  apply  to  all 
persons,  whether  traders  or  not,  and  to  enable  a  debtor  to  go  into 
voluntary  bankruptcy  and  secure  a  discharge. 

Thus,  by  an  extension  of  insolvency  laws  so  as  to  discharge  a 
debtor  from  his  debts  as  well  as  from  imprisonment,  and  by  an 


§§43,44]  BY  BANKRUPTCY  57 

extension  of  the  bankruptcy  laws  to  include  all  debtors,  the  two 
classes  of  laws  became  practically  alike. 

43.  The  state  insolvency  laws.  Our  American  states  have 
passed  laws  which  sometimes  resemble  insolvency  laws  and  some- 
times resemble  bankruptcy  laws.  The  main  distinction  to  be 
observed  is  whether,  upon  assigning  all  his  property  for  the  bene- 
fit of  his  creditors,  the  debtor  is  discharged  from  further  liability 
for  his  debts  then  existing.  If  so,  the  law,  whatever  it  may  be 
called,  is  practically  a  bankruptcy  law ;  if  not,  it  is  practically  an 
insolvency  law. 

Any  state  law  which  is  in  effect  a  bankruptcy  law  is  now  sus- 
pended by  the  National  Bankruptcy  Law,  which  went  into  effect 
July  I,  1898  (see  next  section). 

Any  state  law  which  merely  governs  the  voluntary  assignment 
of  property  for  the  benefit  of  creditors,  and  is  to  that  extent  an 
insolvency  law,  is  not  suspended  ;  but  a  voluntary  assignment  for 
the  benefit  of  creditors  is  an  act  of  bankruptcy,  and  the  creditors 
may  bring  the  assigning  debtor  under  the  National  Bankruptcy 
Law  if  they  choose. 

44.  National  Bankruptcy  Law  of  1898.  The  Constitution  of 
the  United  States  confers  upon  Congress  the  power  "to  establish 
uniform  laws  on  the  subject  of  bankruptcies  throughout  the  United 
States."  If  Congress  does  not  pass  such  laws,  the  states  are  free 
to  do  so.  But  if  Congress  does  pass  such  laws,  the  state  bank- 
ruptcy laws  cease  to  operate  while  such  national  statutes  are  in 
force.  National  bankruptcy  laws  have  been  in  operation  from 
1800  to  1803,  from  1 84 1  to  1843,  from  1867  to  1878,  and  since 
July  I,  1898.  The  state  laws  are  therefore  now  suspended,  but 
would  revive  if  the  federal  statute  were  repealed.  If  a  person  is 
discharged  in  bankruptcy  from  his  debts,  he  may  revive  any  of 
them  by  an  express  promise  to  pay  them.  Such  promise  requires 
no  new  consideration  ;  it  simply  waives  the  bar  raised  by  the 
discharge  in  bankruptcy. 

The  L'nitcd  States  Bankruptcy  Law  provides  that  "acts  of  bankruptcy  by 
a  person  shall  consist  of  his  having  (i)  conveyed,  transferred,  concealed,  or 
removed,  or  permitted  to  be  concealed  or  removed,  any  part  of  his  property 
with  intent  to  hinder,  delay,  or  defraud  his  creditors,  or  any  of  them  ;  or  (2) 
transferred,  while  insolvent,  any  portion  of  his  property  to  one  or  more  of 


58  niSClIARGK  OF  CONTRACTS  [Cn.  Ill 

his  creditors  with  intent  to  prefer  sucli  creditors  over  his  other  creditors ;  or 
(3)  suffered  or  permitted,  while  insolvent,  any  creditor  to  obtain  a  preference 
through  legal  proceedings,  and  not  having  at  least  five  days  before  a  sale  or 
final  disposition  of  any  property  affected  by  such  preference  vacated  or  dis- 
charged such  preference ;  or  (4)  made  a  general  assignment  for  the  benefit  of 
his  creditors,  or  being  insolvent,  applied  for  a  receiver  or  trustee  for  his 
property  or  because  of  insolvency  a  receiver  or  trustee  has  been  put  in  charge 
of  his  property  under  the  law  of  a  state,  of  a  territory,  or  of  the  United  States ; 
or  (5)  admitted  in  writing  his  inability  to  pay  his  debts  and  his  willingness  to 
be  adjudged  a  bankrupt  on  that  ground." 

It  further  provides  that  "a  person  shall  be  deemed  insolvent  .  .  .  whenever 
the  aggregate  of  his  property,  exclusive  of  any  property  which  he  may  have 
conveyed,  transferred,  concealed,  or  removed,  or  permitted  to  be  concealed 
or  removed,  with  intent  to  defraud,  hinder,  or  delay  his  creditors,  shall  not,  at 
a  fair  valuation,  be  sufficient  in  amount  to  pay  his  debts." 

.  It  further  provides  that  {a)  any  person,  except  a  municipal,  railroad,  insur- 
ance, or  banking  corporation,  shall  be  entitled  to  the  benefits  of  this  act  as  a 
voluntary  bankrupt;  {h)  any  natural  person,  except  a  wage  earner  (earning  not 
more  than  $1500  a  year)  or  a  person  engaged  chiefly  in  farming  or  the  tillage 
of  the  soil,  any  unincorporated  company,  and  any  moneyed,  business,  or  com- 
mercial corporation,  except  a  municipal,  railroad,  insurance  or  banking  cor- 
poration, owing  debts  to  the  amount  of  $1000  or  over,  may  be  adjudged  an 
involuntary  bankrupt;  {c)  a  partnership,  during  the  continuation  of  the  partner- 
ship business,  or  after  its  dissolution,  and  before  a  final  settlement  thereof, 
may  be  adjudged  a  bankrupt. 

It  further  provides  for  the  discharge  of  the  bankrupt  unless  he  has  been 
guilty  of  fraud  or  concealment.  The  discharge  releases  him  from  all  debts, 
except  taxes,  liabilities  for  obtaining  property  by  false  pretenses  or  false  repre- 
sentations, willful  and  malicious  injuries,  alimony,  support  of  wife  or  child, 
seduction,  criminal  conversation,  debts  not  scheduled  in  time  for  proof  and 
allowance,  or  debts  created  by  fraud,  embezzlement,  misappropriation,  or 
defalcation  while  acting  as  an  officer  or  in  any  fiduciary  capacity. 

The  claims  provable  against  a  bankrupt  include  judgments,  open  accounts 
and  contracts,  and  instruments  in  writing,  whether  yet  payable  or  not,  such 
as  promissory  notes.  Claims  that  must  be  enforced  in  tort  actions  are  not 
provable  unless  already  reduced  to  judgment,  in  which  case  the  judgment  is 
provable. 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  32.  Who  are  liable  on  contracts.?  What  exception  to  this  rule 
is  there.?  How  may  a  third  person  render  himself  liable  by  interfering  with  a 
contract .?    What  is  a  boycott  1 

33.  May  a  third  person  (X)  sue  upon  a  contract  made  by  A  and  B  ?  Under 
what  circumstances  ?  May  a  person  not  named  in  the  contract  between  A  and 
B  sue  upon  it?    When.? 


REVIEW  QUESTIONS  AND  PROBLEMS  59 

Problem  i.  B  engages  A  to  make  an  abstract  of  B's  title  to  real  property. 
A  negligently  fails  to  note  on  the  abstract  a  recorded  mortgage  which  is  a  lien 
on  the  lands.  B  wishes  to  borrow  money  of  X  upon  mortgage,  and  gives  him 
the  abstract  which  shows  the  land  clear  of  encumbrances.  X  loans  the  money 
and  takes  a  mortgage.  He  then  discovers  the  prior  mortgage.  The  land  is 
insufficient  in  value  to  pay  both  mortgages,  and  X  suffers  loss.  He  sues  A  for 
damages.    Can  he  recover? 

34.  Why  can  a  person  not  assign  his  liabilities.?  What  rights  under  a 
contract  can  one  assign.?  What  rights  can  he  not  assign.?  What  does  the 
assignee  get.? 

Proble>n  2.  B  contracted  to  sell  to  X  10,000  tons  of  ore  at  the  rate  of 
50  tons  a  day,  to  become  the  property  of  X  when  delivered.  After  delivery 
the  ore  was  to  be  sampled  and  assayed  and  the  price  fixed  by  the  daily  market 
quotation.  X  assigned  the  contract  to  C.  B  refused  to  deliver  to  C,  who  sues 
B  for  damages.    Is  B  liable.? 

Problem  j.  B  contracted  to  make  certain  articles  for  X,  to  be  used  by  him 
in  his  business  and  to  be  paid  for  when  delivered.  X  sold  his  business  to  C 
and  assigned  this  contract  to  C.  B  refused  to  supply  the  articles  to  C,  who 
sues  B  for  damages.    Is  B  liable? 

Problem  4.  B  contracts  to  sing  at  X's  theater.  X  sells  the  theater  to  C 
and  assigns  B's  contract  to  C.  B  refuses  to  sing,  and  C  sues  B  for  breach 
of  contract.    Is  B  liable? 

35.  Distinguish  assignability  from  negotiability.  To  what  contracts  does 
the  latter  apply  ? 

36.  What  effect  does  the  death  of  a  party  have  upon  a  contract?  What 
contract  obligations  do  not  survive  death?  What  is  the  effect  of  the  bank- 
ruptcy of  a  party  to  a  contract?  At  common  law  what  was  the  effect  of 
marriage  upon  a  woman's  contracts?    How  is  this  changed  by  statutes? 

37.  How  may  parties  discharge  their  contracts  by  agreement  ?  Does  a  bilat- 
eral contract  need  a  new  consideration  for  mutual  discharge  ?  Does  a  unilateral 
contract  ?  Give  an  example  of  substituted  contract  and  of  a  contract  containing 
provisions  for  a  discharge.  What  is  discharge  by  performance  ?  What  is  the 
effect  of  tender  of  performance  ?  What  is  legal-tender  money  ?  What  is  the  effect 
of  taking  a  debtor's  check?  What  is  the  doctrine  of  substantial  performance? 
What  is  the  effect  of  promising  to  perform  to  the  satisfaction  of  another? 

Problem  j.  C  sold  B  a  horse  on  condition  that  B  might  use  it  and,  if  he 
did  not  like  it,  might  return  it.  B  used  the  horse  so  badly  that  it  was  injured. 
B  then  offered  to  return  it,  but  C  refused  to  receive  it  and  sued  for  the  price. 
Can  he  recover? 

38.  Effect  of  impossibility  existing  when  contract  is  made?  existing  and 
not  known?  arising  subsequently?  What  three  exceptions  to  the  general  rule 
are  there?    Explain  and  illustrate  each. 


DO  DISCHARGE  OF  CONTRACTS  L^  "  "T 

rroblem  6.  B  agreed  to  sell  and  deliver  to  C  607  particular  bales  of  cotton 
marked  and  identified.  B  delivered  460  bales,  when  the  remaining  147  bales 
were  destroyed  by  fire  without  fault  of  either  party.  C  sues  B  for  breach  of 
contract  in  not  delivering  the  147  bales.    Is  B  liable.? 

Problcin  7.  B  engages  C  as  a  farm  servant.  B  dies.  B's  executor  refuses 
to  retain  C  on  the  farm.  C  sues  the  executor  for  breach  of  B'a  contract.  May 
he  recover .'' 

39.  When  will  breach  by  one  party  discharge  the  other?  What  is  an 
anticipatory  breach,  and  what  is  its  effect.''  When  will  breach  by  one  not 
discharge  the  other.?  What  are  divisible  contracts.?  What  are  independent 
promises.?    Effect  of  breach  of  warranty? 

Problem  8.  B  bought  a  quantity  of  iron  of  C  in  January,  1880,  to  be  de- 
livered and  paid  for  on  July  15,  1880.  On  June  12,  1880,  B  notified  C  that 
he  would  not  receive  or  pay  for  the  iron.  C  sold  the  iron  elsewhere  and  sued 
B  at  once  for  damages  without  waiting  until  July  15.    May  he  recover? 

Problem  g.  B  engaged  C  to  clean  and  repair  certain  pictures  at  a  specified 
price  for  each.  After  C  had  begun  work,  B  countermanded  the  order,  but  C  per- 
sisted in  finishing  the  work  and  sued  B  for  the  full  contract  price.  Can  he  recover? 

Proble?n  jo.  B  buys  C's  farm  for  $3000  on  these  terms :  $500  down ; 
$1000  in  three  months;  $1500  in  six  months;  the  deed  to  be  delivered  to 
C  at  the  end  of  six  months,  (a)  C  sues  for  the  $1000  at  the  end  of  three 
months,  {b)  C  sues  for  the  $1500  at  the  end  of  six  months.  In  each  case 
B  defends  on  the  ground  that  C  has  not  delivered  the  deed.    Result? 

40.  If  A  breaks  his  contract  with  B,  state  B's  rights  and  remedies.  What 
is  specific  performance  and  by  what  court  granted?  What  is  the  Statute  of 
Limitations?    How  may  a  debt  barred  by  that  statute  be  revived? 

Probletn  11.  B  sells  C  10,000  bushels  of  potatoes  at  50  cents  a  bushel, 
to  be  delivered  in  quantities  of  500  bushels.  B  delivers  2000  bushels,  when 
C  refuses  to  receive  any  more.  Assume  potatoes  to  be  worth  at  the  time  of 
breach  60  cents  a  bushel ;  how  much  may  B  recover  of  C  in  case  he  sues  C 
for  breach  of  the  contract?  How  much  may  he  recover  if  he  disregards  the 
express  contract  and  sues  for  the  value  of  the  potatoes  actually  delivered  ? 

Proble?n  12.  If  in  the  above  problem  the  market  price  of  potatoes  at  the 
time  C  commits  the  breach  is  40  cents  a  bushel,  what  will  be  the  most  advan- 
tageous remedy  for  B  to  pursue? 

41.  What  was  the  object  of  the  first  insolvency  laws?    How  extended? 

42.  What  were  bankruptcy  laws  and  for  whose  benefit  were  they  enacted? 
How  extended? 

43.  What  is  now  the  distinction  between  insolvency  laws  and  bankruptcy 
laws?   Are  bankruptcy  laws  in  force  by  state  legislation?  Are  insolvency  laws? 

44.  When  have  national  bankruptcy  laws  been  in  force  ?  How  long  has  the 
present  one  been  in  force?    Give  some  of  its  provisions. 


PART   11.    PARTICULAR  CONTRACTS 
CONCERNING  GOODS 

^     CHAPTER  IV 

SALES  OF  GOODS 
I,    The  Contract 

45.  Definition  and  analysis.  The  sale  of  goods  is  now  regulated 
in  many  states  ^  by  the  Uniform  Sales  Act.  This  statute  was  pre- 
pared by  the  Conference  of  Commissioners  on  Uniform  State 
Laws.  It  sets  forth  the  rights  and  duties  of  seller  and  buyer  in 
contracts  relating  to  the  sale  of  goods,  and,  while  changing  the 
law  in  some  states  in  some  respects,  it  in  the  main  embodies  the 
previously  existing  common-law  views.  A  contract  of  sale  is  a  con- 
tract whereby  the  seller  transfers  or  agrees  to  transfer  the  property 
in  goods  to  the  buyer  for  a  money  consideration  called  the  price. 
Where  the  result  of  the  contract  is  to  transfer  the  title  to  the  goods 
to  the  buyer,  there  is  strictly  a  sale  ;  but  where  the  title  is  to  be  trans- 
ferred at  some  later  time,  there  is  only  an  agreement  to  sell.  The 
agreement  to  sell  becomes  a  sale  when  the  title  is  in  fact  transferred. 

Examples :  i.  "  I  will  sell  you  my  horse  for  ?ioo."  "  I  accept."  This  is 
a  sale.  The  title  passes  at  once.  If  the  horse  dies,  the  loss  falls  on  the  buyer, 
even  though  the  horse  had  not  yet  been  delivered. 

2.  "  I  will  sell  you  my  colt  for  ?ioo  when  he  is  a  year  old."  "  I  accept." 
This  is  an  agreement  to  sell.  The  title  remains  with  the  seller  until  the  colt  is  a 
year  old.    It  then  passes  to  the  buyer  and  the  agreement  to  sell  becomes  a  sale. 

3.  The  colt  dies  before  he  is  a  year  old,  without  fault  of  cither  party.  The 
contract  is  discharged. 

I.  //  is  a  contract.  This  implies  all  the  elements  heretofore 
discussed,  namely,  agreement,  competent  parties,  suflficicnt  con- 
sideration, in  some  cases  a  particular  form,  legality,  and  real 
assent.     These   need    not   be   again   discussed   at    this   point,   but 

'  Alaska.  Arizona,  ronnecticut.  Idaho,  Illinois,  Iowa.  Maryland,  Massachusetts, 
Michigan,  Minnesota,  Missouri,  Nevada.  Xc'wjcrsey.  New  N'ork.  North  Dakota,  Ohio, 
Oregon,  I'cnnsylvania,  Rhode  Island.  Tennessee,  Utah,  Wisconsin,  and  Wyoming. 

61 


62  SALES  OF  GOODS  [>■'.  IV 

the  nature  of  the  consideration  (money)  and  the  form  (Statute 
of  Frauds)  will  call  for  notice  under  another  head.  It  is  also 
important  to  note  that  where  necessaries  are  sold  to  an  infant, 
or  minor,  or  to  a  person  under  mental  incapacity,  as  a  lunatic, 
he  must  pay  a  reasonable  price  therefor.  What  are  necessaries 
depends  upon  the  social  and  financial  condition  of  the  infant  or 
lunatic,  and  upon  his  actual  needs  at  the  time  of  the  sale  (see 
sects.  15  and  16  (7ntc). 

2.  Whereby  the  seller  transfers  or  agrees  to  transfer.  If  the 
seller  transfers  the  property  in  the  goods,  the  sale  is  said  to 
be  executed  ;  the  seller's  title  is  divested ;  the  buyer's  title  is 
vested.  If  the  seller  merely  agrees  to  transfer  the  property 
in  the  goods,  the  sale  is  said  to  be  executory ;  the  seller's  title 
is  not  disturbed  ;  the  buyer  has  only  a  right  of  action  under 
the  contract,  and  he  has  not  any  title  in  the  goods.  It  is  one 
of  the  important  questions  in  the  law  of  sales  as  to  when  the 
title  passes,  that  is,  whether  the  sale  is  executed  or  executory. 
This  will  be  discussed  hereafter.  It  should  be  observed  that 
the  contract  may  be  executory  while  the  sale  is  executed ;  that 
is,  the  agreement  to  pass  title  is  executed  while  the  rest  of  the 
agreements  are  executory. 

Exatnples :  4.  "  I  will  sell  you  my  horse  for  $100  and  deliver  him  to  you 
to-morrow  at  your  farm,  you  to  pay  the  money  at  that  time."  "  I  accept." 
This  is  an  executed  sale,  that  is,  the  title  passes  at  once  to  the  buyer;  but 
it  is  still  an  executory  contract,  that  is,  each  party  has  still  something  to  do 
in  the  way  of  performance. 

5.  If  the  seller  and  the  buyer  agree  as  above,  but  the  seller  also  agrees 
to  shoe  the  horse  before  delivery,  the  title  does  not  pass  until  the  horse  is 
shod.    This  is  an  executory  sale  and  an  executory  contract. 

3.  Property  in  the  goods.  By  the  term  '"  goods  "  is  meant,  gen- 
erally, every  kind  of  personal  property,  except  money  and  choses 
in  action.  Examples  of  goods  are  corporeal  movable  property, 
like  a  horse  or  a  bushel  of  wheat ;  incorporeal  property,  like  a 
patent  right  or  a  trade-mark.  By  property  is  meant  the  owner- 
ship of  the  goods  or  the  general  title  to  the  goods.  In  order  to 
pass  this  property  to  the  buyer,  it  is  necessary  that  the  seller 
should  have  it,  for  the  general  rule  in  sales  is  that  "  a  buyer 
acquires  no  better  title  to  goods  than  the  seller  had."  Three 
important  exceptions  to  this  rule  may  be  noted. 


§45]  THE  CONTRACT  63 

^.  In  the  negotiation  of  negotiable  instruments  the  transferor  may 
give  a  better  title  than  he  has  himself.   This  is  not  technically  a  sale. 

b.  By  the  Factors  Acts  it  is  provided  that  a  factor  or  com- 
mission merchant  who  is  intrusted  by  the  owner  with  goods  or 
documents  of  title  representing  goods,  under  conditions  indicating 
apparent  authority  to  sell,  may  sell  or  otherwise  dispose  of  them 
and  give  good  title  as  if  he  were  the  true  owner  of  the  goods 
or  documents  or  had  authority  from  the  true  owner. 

c.  If  the  buyer  leaves  the  seller  in  possession  of  the  goods, 
or  of  the  documents  of  title  to  the  goods,  and  the  seller  resells 
and  delivers  them  to  another  innocent  purchaser,  many  courts 
hold  that  the  latter  may  retain  them  as  against  the  first  buyer, 
since  the  first  buyer  has  made  it  possible  for  the  seller  to  com- 
mit the  fraud.  So,  if  the  true  owner  invests  another  person 
with  the  indicia  of  ownership,  and  the  latter  sells  to  an  inno- 
cent purchaser  for  value,  the  true  owner  will  be  estopped  to 
set  up   his  title  against  the   innocent  purchaser. 

But  if  one  sells  and  delivers  goods  to  another,  retaining  title 
in  himself  as  security  for  the  purchase  money,  and  the  buyer 
resells  them  to  an  innocent  purchaser  for  value,  the  latter  gets 
at  common  law  no  title  against  the  first  seller,  who  retained  the 
title.  This  has  led  to  such  hardship  upon  innocent  purchasers 
that  statutes  now  generally  provide  that  such  conditional  sales 
shall  be  void  as  against  innocent  purchasers  from  the  vendee, 
unless  they  are  in  writing  and  recorded  in  some  public  office. 
The  retention  of  title  is  merely  a  form  of  security,  like  a  chattel 
mortgage,  and  chattel  mortgages  are  not  valid  against  innocent 
purchasers  of  the  mortgaged  chattels  unless  duly  recorded. 

When  the  seller  has  been  induced  by  fraud  of  the  buyer  to 
sell  his  goods  and  part  with  the  possession,  he  may  rescind  the 
contract  and  recover  the  goods.  But  if,  before  he  does  so,  the 
buyer  resells  them  to  an  innocent  purchaser  for  value,  the  latter 
gets  a  title  good  against  the  first  seller. 

Who  is  "  a  purchaser  in  good  faith  and  for  value  "  }  First,  one 
who  purchases  without  notice  of  his  vendor's  defective  title,  or  of 
facts  which  should  put  him  upon  inquiry  concerning  the  title  ;  and, 
second,  one  who  also  pays  a  valuable  consideration.  A  promise 
to   pay   is  not  sufficient,  since,   if  the   true  owner   recovers  the 


64  SALES  OF  GOODS  [Ch.  IV 

goods,  this  purchaser  will  never  be  obliged  to  pay  his  vendor. 
On  the  question  of  whether  taking  the  goods  in  payment  of  an 
antecedent  debt  owing  him  from  his  vendor  makes  the  buyer  a 
purchaser  for  value,  the  courts  differ.  Some  hold  it  does  not, 
because  if  the  buyer  has  to  give  up  the  goods  the  debt  is  restored 
and  he  is  in  no  worse  position  than  he  was  before ;  others  hold 
that  it  does,  because  the  buyer  has  been  '"  lulled  into  security  "  and 
may  thereby  lose  the  debt  which  he  otherwise  would  have  col- 
lected. There  is  the  same  difference  of  opinion  where  the  buyer 
takes  the  goods  from  his  vendor  as  collateral  security  (pledge)  for 
a  preexisting  debt.  It  is  generally  held  that  an  attaching  creditor 
or  an  assignee  in  bankruptcy  is  not  a  purchaser  for  value. 

Exa?nplcs :  6.  B  sells  his  horse  to  C,  and  C  allows  B  to  retain  possession. 
B  then  sells  and  delivers  the  horse  to  D,  who  does  not  know  of  the  previous 
sale.  D  may  retain  the  horse  as  against  C,  for  the  latter  by  leaving  B  in 
possession  made  it  possible  to  commit  the  fraud,  and  C  must  suffer  the  loss 
rather  than  D. 

7.  B  owns  a  wagon.  He  rents  it  to  C,  who  paints  on  it,  "  C,  Piano  Mover," 
and  uses  it  in  his  business.  C  sells  the  wagon  to  D,  who  believes  C  to  be  the 
owner.  B  cannot  reclaim  it  from  D.  He  has  invested  C  with  the  indicia  of 
ownership.  But  if  B  had  merely  rented  the  wagon  without  authorizing  C  to 
put  his  name  on  it,  the  purchaser  would  have  obtained  no  title  as  against  B. 

8.  B  sells  and  delivers  a  piano  to  C,  but  by  the  contract  retains  tide  until 
it  is  fully  paid  for.  C  sells  it  to  D  for  value,  D  supposing  C  to  be  the  owner. 
B  brings  an  action  to  recover  it  from  D.  B  will  recover  unless  some  statute 
changes  the  rule  of  the  common  law  (in  a  very  few  states  the  holding  is  for 
D  without  the  aid  of  statute);  but  D  gets  whatever  rights  C  had,  and,  by 
paying  what  the  latter  still  owes,  may  acquire  title,  unless  C  has  already  by 
default  forfeited  his  rights. 

9.  B  sells  and  delivers  buggies  to  C,  a  retail  dealer  in  buggies,  but 
retains  title  in  the  buggies  and  provides  that  the  proceeds  of  sales  by  C 
shall  belong  to  B  so  far  as  necessary  to  pay  B.  C  sells  his  whole  business 
and  stock  to  D,  including  these  buggies,  and  B  brings  an  action  against 
D  to  recover  them.  It  is  held  that  B  cannot  recover,  because  he  has 
authorized  C  to  sell.  There  are  two  inconsistent  provisions,  —  that  B  shall 
have  tide,  and  that  C  shall  sell  and  give  good  tide.  The  latter  must  prevail 
as  to  an  innocent  purchaser  from  C. 

10.  B  sells  goods  to  C,  who  gives  B  in  payment  a  bill  of  exchange  accepted 
by  X.  It  turns  out  that  the  bill  is  fictitious,  no  such  person  as  X  being  in 
existence.  C  resells  and  delivers  the  goods  to  D,  and  B  then  seeks  to  recover 
the  goods  from  D.  He  cannot  do  so.  B  has  a  right  to  rescind  the  contract 
with  C  for  fraud  and  recover  the  goods  while  in  C's  hands;  but  he  cannot 
recover  them  from  D,   who  has  purchased  in  good  faith  from  C. 


Bill  of  Sale 

linoto  all  0itn  bp  tljese  presents, 

That..?.^.?.V9^?;^.4.A*?^?.P.?.•...°.^..^^?..?.i.^.y  .?.^..^°'='^P°''t-   Niagara  County,  New  York. 

T of  the  first  part,  for  and  in  consideration  of  the  sum 

oilfJ} Dollars    {$^P.:99.TTr:.),  lawful  money  of  the  United  States, 

to 9.f. in    hand  paid,  at  or  before  the  ensealing    and  delivery  of    these 

presents,  by..f9.^^P|>..P"<^^®y\.  °f  ^^®  same  place, 

of  the  second  part,  the  receipt  whereof  is  hereby  acknowledged,  /la  ve  bar- 
gained  and   sold,   and  by  these  presents  i/o     grant  and  convey  unto  the  said 

party  of  the  second  part. .^A ?. executors,  administrators  and    assigns, 

the  twelfth  edition  of  Kent's  "Commentaries  on  American  Law,"  edited  by 
0.   W.    Holmes,    Tr- 

Co  |)ai)e  ani  to   I^OllI   the  same   unto   the  said  party    of   the    second   part, 

y^y.f. executors,  administrators  and  assigns  forever.      And }. 

do  covenant  to  and  with  the  said/ar^y  of  the  second  part  that.rrTr..?..?:?..TTT7.the 
owner  and  ha  ve  the  right  to  sell  and  transfer  the  said  property,  and  will  defend 
the  same  against  any  person  or  persons  whomsoever  claiming  the  same. 

^Tn  W\tW.t^^  ?^()CrCOf,,^-I— /.,:ve  hereunto  s^frrr.W.—r-. 
hand  and  seat  the .^?.9.P.'?.4 day  of M?-.y. in  the  year  One  thou- 
sand nine  hundred  and ?.i.?.k?.?.'} 

5n  presence  of  f^UllduL   (ltil'}V^  £^ 


.[L..S.] 


,:§itate  of  jftrtD  gorfi, 

County  of ^y^.i^^.^. 

^^V^        of       Lockport 


On  this ?.°.9°r.^. day  of ^^^. in  the  year  One  thousand  nine 

hundred  and.°A?^te.°.n before    me,   the    subscriber,  personally   appeared 

?A .9^^.r.'?. .f  Vf An? to  me  personally  known  to  be  the  same 

person    described  in  and  who  executed  the  foregoing  instrument,  and    he 

acknowledged  to  me  that     he     executed  the  same. 

r  NOTARY  '  S  ^                                        cZ-i^t^-^    ^.     C/'/^.r^, 
\      SEAL      J                         Notary  Public  for  Hlagara  County,   New  York, 
65 


66  SALES  OF  GOODS  [Cii.  IV 

II.  B  is  induced  by  fraud  to  sell  goods  to  C,  who  then  transfers  them  to 
I)  in  payment  of  a  prior  debt  owing  by  C  to  D.  B  rescinds  the  contrzict  with 
C  and  seeks  to  recover  the  goods  from  D.  In  New  York  B  may  recover,  as 
it  is  held  that  D  is  not  a  purchaser  for  value.  In  England  and  under  the  Uni- 
form Sales  Act  generally  D  is  held  to  be  a  purchaser  for  value  and  B  cannot 
recover  the  goods. 

4.  For  a  money  co)isideratio)i  called  the  p7-iee.  A  sale  differs 
from  a  barter  in  that  in  a  sale  the  consideration  must  be  in  money, 
while  in  a  barter  it  may  be  other  goods,  labor,  or  the  like.  It  is' 
not  necessary  that  the  price  should  be  fixed  by  the  contract.  It  is 
enough  if  it  is  ascertainable,  and  it  may  be  ascertained  by  the  ordi- 
nary market  price  or  left  to  some  third  person  to  fix  or  determine. 

5.  Bill  of  sale.  A  bill  of  sale  is  a  formal  document,  corre- 
sponding to  a  deed  of  real  property,  whereby  the  seller  transfers 
to  the  buyer  the  title  to  specified  goods  and  (usually)  warrants 
the  title.  It  is  used  in  sales  of  any  considerable  amount,  but  may 
be  used  in  any  sale. 

46.  Statute  of  Frauds.  The  seventeenth  section  of  the  Statute 
of  I^>auds  provides  that  contracts  for  the  sale  of  goods  of  the  value 
of  ^10  ($50)  or  more  must  be  evidenced  either  (i)  by  the  ac- 
ceptance and  receipt  of  the  goods  or  part  of  them,  or  (2)  by  the 
payment  of  some  part  of  the  purchase  price,  or  (3)  by  some  note 
or  memorandum  in  writing  signed  by  the  party  to  be  charged  or 
by  his  lawful  agent  (see  sect.  22  ajite). 

1.  What  are  goods?  The  English  statute  uses  the  phrase 
"  goods,  wares,  or  merchandise."  Under  this  it  was  held  that  the 
sale  of  choses  in  action  (that  is,  shares  of  stock,  contract  claims, 
etc.)  need  not  comply  with  the  statute,  since  they  were  not  "goods, 
wares,  or  merchandise."  The  holding  in  the  United  States  has 
been  generally  to  the  contrary.  In  many  states  the  statute  now 
expressly  names  "  choses  in  action,"  and  in  many  the  term  "  per- 
sonal property  "  is  substituted. 

2.  Distinction  between  cont^'act  of  sale  and  contract  for  zvork 
and  labor.  It  is  sometimes  difficult  to  tell  whether  a  contract  is 
one  of  sale  or  one  for  work  and  labor.  If  the  former,  it  must 
satisfy  the  statute ;  if  the  latter,  it  is  not  within  the  statute  at  all. 

Example  i.  A  goes  to  B's  carriage  factory  and  orders  B  to  make  a  car- 
riage according  to  a  certain  description,  for  which  A  agrees  to  pay  $250. 
When  it  is  finished,  A  refuses  to  take  it,  and  pleads  the  Statute  of  Erauds.    Is 


§46]  THE  CONTRACT  6/ 

this  a  contract  of  sale?  If  so,  B  cannot  recover  against  A,  because •  there  has 
been  no  receipt  of  goods,  no  part  payment,  and  no  note  or  memorandum  in 
writing.  Or  is  it  a  contract  for  work  and  labor?  If  so,  B  may  recover  against 
A  because  such  a  contract  is  not  mentioned  in  the  Statute  of  Frauds,  and  is 
therefore  good  however  made  or  evidenced.  There  are  two  different  rules  that 
have  been  applied  to  solve  this  problem,  {a)  The  English  rule  is  that  if  the 
contract  results  in  the  transfer  of  title  to  a  chattel,  it  is  a  sale.  Under  this  rule 
the  contract  specified  is  a  sale  and  the  statute  is  a  good  defense,  {b)  The 
general  American  rule  and  the  rule  under  the  Uniform  Sales  Act  is  that  if 
the  article  is  such  as  the  vendor,  in  the  ordinary  course  of  his  business,  manu- 
factures for  the  general  market,  the  contract  is  one  of  sale ;  but  if  it  is  made 
to  a  special  order  for  a  special  purchaser,  and  not  for  the  general  market,  the 
contract  is  for  work  and  labor.  Under  this  rule  the  contract  specified  would 
be  for  work  and  labor,  and  the  statute  would  not  be  a  defense. 

The  English  rule  looks  to  the  time  of  performance.  The  Massachusetts,  or 
American,  rule  looks  to  the  nature  of  the  contract  itself. 

3.  Distinction  betioccn  personalty  and  realty.  It  is  also  some- 
times difficult  to  tell  whether  articles  attached  to  lands  or  build- 
ings are  personal  property  or  real  property ;  for  example,  crops, 
trees,  ice,  fixtures,  etc.  In  general,  crops  raised  annually  by  labor 
are  treated  as  personalty,  while  trees,  perennial  crops,  and  the 
like  are  treated  as  interests  in  land.  Mineral  products  generally 
are  realty,  but  ice  has  been  held  to  be  personalty.  Under  the 
Uniform  Sales  Act  a  sale  of  anything  attached  to  or  forming  a 
part  of  land,  which  is  to  be  severed  from  the  land  at  any  time, 
is  a  .sale  of  goods.  If  the  article  sold  is  treated  as  realty,  then, 
whatever  its  value  there  must  be  a  writing.  If  it  is  treated  as 
personalty,  there  need  be  no  formality  unless  it  is  of  the  value  of 
$50,  and  then  a  writing  may  be  dispensed  with  if  there  is  part 
acceptance  and  receipt  or  part  payment  (sec  sects.  165,  \G6  f-ost). 

Examples  :  2.  B  sold  C  by  parol  a  growing  crop  of  five  acres  of  turnips 
for  ?25,  no  present  payment.  B  gathered  the  turnips  when  ripe  and  C 
claimed  them.  B  pleads  the  Statute  of  Frauds.  The  statute  does  not  apply. 
The  turnips  while  growing,  as  well  as  when  gathered,  arc  personalty,  and  not 
an  interest  in  lands.  They  are  an  annual  crop,  known  to  the  law  as  fnutus 
indiisirialcs. 

3,  1j  sold  a  growing  crop  of  hay  Id  C  by  jjarol  f(jr  >5oo.  witli  no  payment 
down.  B  gathered  the  hay.  C  claims  it.  B  pleads  the  Statute  of  Frauds. 
Under  the  Uniform  Sales  Act  the  contract  is  one  for  the  sale  of  goods,  since 
the  hay  is  to  be  severed  under  the  contract,  and,  as  there  is  no  part  payment, 
acceptance  and  receipt,  or  memorandum,  the  Statute  of  Frauds  is  a  defense. 


68  SALKS  OF  GOODS  [Cn.  IV 

4.  Acceptance  and  receipt.  One  way  of  satisfying  tiie  Statute 
of  I^^rauds  is  b)-  an  acceptance  and  receipt  of  the  goods  or  a  jwrt 
of  them.  Hoth  acceptance  and  receipt  are  necessary  to  satisfy 
the  statute,  although  not  necessary  to  pass  title. ^  Acceptance  is 
signifying  that  the  goods  are  in  conformity  with  the  contract. 
Receipt  is  taking  the  goods  actually  or  constructively  into  the 
custody  of  the  buyer. 

Examples :  4.  B  buys  a  quantity  of  wheat  of  C,  who  takes  a  load  to  B's 
warehouse,  where  it  is  inspected  by  B  and  accepted.  B  afterwards  refuses  to 
take  the  rest,  and  when  sued,  pleads  the  statute.  His  acceptance  and  receipt 
of  one  load  satisfies  the  statute,  and  C  may  prove  the  contract  for  the  whole. 

5.  Acceptance  may  take  place  without  receipt.  Thus,  B  inspects  the  wheat 
in  C's  granary  and  expresses  his  assent  to  becoming  the  owner.  If  this  wheat 
be  then  delivered  to  a  common  carrier,  as  a  railway  company,  for  transporta- 
tion to  B  by  his  direction,  there  is  both  acceptance  and  receipt,  because  the 
carrier  is  regarded  as  agent  of  the  buyer  to  receive,  although  not  to  accept. 

5.  Pa?'t  payment.  If  one,  instead  of  accepting  and  receiving 
the  goods,  pays  any  part  of  the  purchase  money,  this  also  satisfies 
the  statute,  and  he  is  bound  by  the  contract.  Generally  payment 
at  any  time  is  suflficient. 

6.  The  note  or  memorandum.  There  need  not  be  a  full  and 
detailed  written  contract.  It  is  enough  if  it  contain  the  names  of 
the  parties,  the  subject  matter  of  the  sale,  and  the  agreed  price. 
It  may  be  printed  or  written,  and  may  be  in  pencil.  It  is  best 
that  both  parties  should  sign  it,  for  it  is  uncertain  which  may 
seek  to  avoid  the  performance.  But  it  is  enough  that  the  one 
who  is  sought  to  be  charged  has  signed. 

Exatnple  6.  B  buys  of  C  20,000  feet  of  lumber  at  $10  a  thousand  feet. 
B  signs  the  memorandum,  but  C  does  not.  C  may  maintain  an  action  against 
B  in  case  he  refuses  to  take  the  lumber,  but  B  could  not  maintain  an  action 
against  C  in  case  he  refused  to  deliver  it.  If  both  had  signed,  then  each  cQuld 
have  enforced  the  contract  against  the  other. 

An  authorized  agent  may  sign  for  cither  party.  An  auctioneer 
is  the  agent  of  both  buyer  and  seller  for  the  purpose  of  making 
the  memorandum.  The  note  or  memorandum  may  be  contained 
in  two  or  more  papers  or  letters  constituting  a  connected  series. 
It  may  be  made  at  any  time,  and  need  not  be  made  at  the  time 
the  contract  is  formed. 

1  Upon  the  requirements  for  passing  title,  see  sects.  47-49. 


§47]  THE  TITLE  69 

Form  of  Contract  of  Sale 

This  Agreement,  made  this  fifth  day  of  September,  191 6,  between 
John  Doe,  of  Ithaca,  N.Y.,  and  Richard  Roe,  of  the  same  place, 

WITNESSETH,  that  the  said  John  Doe,  in  consideration  of  the  agreement 
hereinafter  contained,  to  be  performed  by  the  said  Richard  Roe,  agrees  to  sell 
and  deliver  to  the  said  Richard  Roe,  at  the  farm  of  the  said  John  Doe,  five 
hundred  bushels  of  potatoes  of  good  marketable  quality,  on  the  twentieth  day 
of  October,  191 6.  And  the  said  Richard  Roe,  in  consideration  thereof,  agrees 
to  pay  to  the  said  John  Doe  the  sum  of  sixty  cents  a  bushel  for  the  said 
potatoes,  immediately  upon  the  completion  of  the  delivery  thereof. 

In  Witness  Whereof,  the  said  parties  have  affixed  hereto  their  respective 

signatures  the  day  and  year  first  above  written. 
°  John  Doe 

Richard  Roe 

A  much  simpler  form  would  satisfy  the  Statute  of  Frauds,  which  requires 
only  a  note  or  memorandum.    For  example : 

John  Doe  has  sold  to  Richard  Roe  five  hundred  bushels  of  potatoes  at 

sixty  cents  a  bushel,  to  be  delivered  Oct.  20,  1916. 

John  Doe 

Ithaca,  N.Y.,  Sept.  5,  1916.  Richard  Roe 

If  only  Doe  signed,  he  would  be  bound  but  Roe  would  not,  and  vice  versa. 

II.    The  Title 

47.  When  does  title  pass?  It  is  important  to  ascertain  the 
time  when  title  passes  from  the  seller  to  the  buyer.  From  that 
moment  the  risk  of  loss  is  on  the  buyer ;  he  is  also  entitled  to 
any  gain  or  increase.  In  case  of  his  death  his  executor  or  admin- 
istrator is  entitled  to  the  goods  ;  during  his  life  his  creditors  may 
attach  the  goods.  He  alone  has  the  full  power  to  sell  them  and 
give  a  good  title  to  the  buyer ;  he  may  maintain  actions  of  re- 
plevin or  trover  in  case  of  conversion  or  unlawful  detainer  by  the 
seller  or  any  other  person.  On  the  other  hand,  the  seller,  in  case 
title  passes  to  the  buyer,  may  maintain  an  action  for  the  price  of 
the  goods ;  whereas,  if  title  has  not  passed,  the  seller's  action 
would  be  for  damages  for  breach  of  the  contract  to  receive  and 
pay  for  the  goods. 

In  determining  the  question  as  to  when  title  passes,  it  is  ncc- 
es.sary  to  cla.ssify  goods  into  (i)  specific  or  ascertained  goods, 
that   is,  goods  upon  which  the   minds  of   the   parties  meet,  and 


yo  SALES  OF  GOODS  [Cii.  IV 

(2)  nonspecific  or  unascertained  goods,  that  is,  goods  described  but 
not  aciually  chosen  or  specifically  indicated, 

Exiunplc.  (\)V>  purchases  all  the  wheat  in  C's  granary;  these  goods  are 
specific.  (2)  B  purchases  of  C  one  thousand  bushels  of  wheat  (no  particular 
wheat  indicated);  these  goods  are  unascertained.  Title  to  the  wheat  in  the 
granary  would  ordinarily  pass  to  B  as  soon  as  the  contract  is  made,  because  de- 
livery is  not  necessary  to  pass  title,  while  title  to  the  one  thousand  bushels  would 
not  pass  until  the  goods  are  ascertained  and  appropriated  by  mutual  consent 

48.  Specific  or  ascertained  goods.  The  general  and  particular 
rules  for  determining  when  title  passes  in  the  sale  of  specific 
goods  are  as  follows  : 

1.  General  iiile.  Where  there  is  a  contract  for  the  sale  of 
specific  or  ascertained  goods,  the  property  in  the  goods  is  trans- 
ferred to  the  buyer  at  such  time  as  the  parties  to  the  contract  in- 
tend it  to  be  transferred.  It  thus  appears  that  the  intention  of 
the  parties  is  the  controlling  test.  If  this  is  expressed,  there  can 
be  no  doubt ;  but  it  is  not  ordinarily  expressed,  and  the  law  has 
therefore  certain  rules  for  ascertaining  it.  In  fixing  these  rules 
the  law  looks  to  the  terms  of  the  contract,  the  conduct  of  the 
parties,  and  all  the  circumstances  of  the  case. 

2.  Partiadai-  rules.  Unless  a  different  intent  appears,  the  fol- 
lowing rules  are  applied  for  the  purpose  of  determining  the  time 
at  which  the  title  to  the  goods  passes  to  the  buyer. 

Rule  i.  Where  there  is  an  unconditional  contract  for  the 
sale  of  specific  goods  in  a  deliverable  state,  the  title  to  the  goods 
passes  to  the  buyer  when  the  contract  is  made,  even  though  pay- 
ment or  delivery,  or  both,  may  be  postponed  to  a  future  time. 

Example  i .  B  purchases  C's  carriage  for  $  i  oo,  and  it  is  agreed  that  the 
carriage  shall  be  delivered  and  the  price  paid  one  week  later.  The  next  day 
the  carriage  burns  up.  B  must  pay  the  price,  because  the  carriage  is  his  under 
this  rule,  as  much  so  as  if  it  had  actually  been  delivered  to  him  and  he  had 
paid  for  it.  (A  very  few  states  hold  that  a  sale  for  cash  is  conditional,  and 
that  the  title  does  not  pass  until  the  price  is  paid  or  payment  waived.  But  the 
better  holding  is  that  the  title  passes  and  the  seller  may  retain  possession 
until   the  price  is  paid.) 

Rule  2.  Where  there  is  a  contract  for  the  sale  of  specific 
goods,  and  the  seller  is  bound  to  do  something  to  the  goods  for 
the  purpose  of  putting  them  into  a  deliverable  state,  the  property 
does  not  pass  until  such  thing  be  done. 


§48]  -  THE  TITLE  7 1 

Example  z.  B  purchases  C's  carriage,  and  C  agrees  to  have  the  carriage 
painted  and  to  deliver  it  one  week  later.  The  next  day,  and  before  the  carriage 
is  painted,  it  burns  up.  B  is  not  bound  to  pay  the  price.  The  loss  falls  upon 
C,  because  the  title  does  not  pass  from  him  to  B  until  the  carriage  is  painted. 
The  loss  falls  upon  him  who  has  the  title.  After  the  carriage  is  painted,  the 
title  passes  to  B  even  before  deliver)'.  In  England  he  must  have  notice  that 
it  is  completed,  but  not  in  the  United  States. 

Rule  3.  Where  there  is  a  contract  for  the  sale  of  goods  in  a 
deUverable  state,  but  the  seller  is  bound  to  weigh,  measure,  test, 
or  do  some  other  act  or  thing  with  reference  to  the  goods  for  the 
purpose  of  ascertaining  the  price,  under  the  prevailing  rule  the 
title  passes,  notwithstanding  that  such  act  or  thing  is  not  done. 

Example  3.  B  purchases  all  the  wheat  in  C's  granary  at  80  cents  a  bushel, 
and  C  agrees  to  measure  the  wheat  in  order  to  ascertain  the  sum  B  is  to  pay. 
The  title  passes  to  B  on  the  making  of  the  contract,  notwithstanding  that  C 
has  not  measured  the  wheat.  Should  it  be  destroyed  in  the  meantime,  the 
loss  would  be  B's  and  not  C's. 

Rule  4.  Where  goods  are  sold  and  delivered  to  the  buyer 
with  an  option  to  return  them,  the  tide  passes  to  the  buyer  subject 
to  be  revested  in  the  seller  by  a  return  within  the  time  specified, 
or,  if  no  time  be  specified,  within  a  reasonable  time.  This  is  a 
case  of  a  sale  upon  condition  subsequent,  that  is,  a  right  to  return 
or  resell  to  the  original  seller.  It  differs  from  the  next  case  in 
that  the  condition  there  is  a  condition  precedent. 

Exajnple  4.  B  purchases  C's  mowing  machine,  with  the  agreement  that 
if  it  does  not  suit  him,  C  will  take  it  back  at  the  price  B  paid  or  agreed  to  pay. 
This  is  a  purchase  by  B  and  a  contract  to  give  B  an  option  to  resell  to  C. 
The  title  is  in  B  until  he  exercises  this  option. 

Rule  5.  Where  goods  are  delivered  to  the  bu\cr  "on  ap- 
proval," the  tide  remains  in  the  seller  until  the  buyer  signifies  his 
approval.  Such  approval  may  be  signified  expressly  or  impliedly. 
If  the  buyer  retains  the  goods  beyond  the  time  fixed,  or,  if  no 
time  be  fixed,  beyond  a  reasonable  time,  he  will  be  regarded  as 
having  signified  his  approval,  and  title  will  then  vest  in  him.  The 
sale  of  the  goods  by  him  would  be  an  approval.  It  is  a  matter  of 
construction  having  regard  to  all  the;  terms  of  the  contract  whether 
the  transaction  is  "on  sale  or  return"  or  "on  approval," 

Example  5.  B  takes  C's  mowing  machine  "on  three  days'  trial  and 
approval."    The  title  is  in  C  until  the  three  days  have  elapsed. 


72  SALES  OF  GOODS  [Cii.  IV 

Rule  6.  Where  there  is  a  sale  of  gootls  in  a  dehverablc  con- 
dition, tlie  seller  may  by  the  terms  of  the  contract  reserve  the 
title  in  himself  until  the  price  is  paid.  This  right  may  be  reserved 
notwithstanding  actual  delivery  to  the  buyer. 

Examples :  6.  B  sells  C  household  goods,  retaining  title  until  the  goods  are 
paid  for.  Title,  as  security  at  least,  is  still  in  B.  It  is  generally  held  that  after 
C  has  possession  the  risk  as  to  loss  falls  upon  him,  since  B's  title  is  in  the 
nature  of  a  security  for  payment  only.  It  is  also  the  law  in  many  states  that 
in  order  to  protect  himself  against  an  innocent  purchaser  of  the  same  goods 
from  C,  the  seller  must  file  the  written  contract  in  some  public  office. 

y.  D  sells  goods  to  C  to  be  shipped.  D,  in  shipping  the  goods,  takes  the 
bill  of  lading  (freight  receipt)  in  his  own  name  or  deliverable  to  his  own  order. 
Tide,  as  security  at  least,  is  still  in  D.  It  is  often  held  that  tide  for  all  other 
purposes  passes  to  C,  and  that  D  merely  retains  possession  or  control  as 
security  for  payment.  Such  would  be  the  case  if  title  passed  to  C  at  the  time 
of  the  sale.  But  if  the  sale  was  executory,  then  D's  conduct  showed  an  intent 
that  title  should  not  pass  until  some  future  time. 

8.  F  sells  goods  to  G,  takes  the  bill  of  lading  in  G's  name,  attaches  it  to  a 
bill  of  exchange  (draft)  drawn  upon  G  for  the  price,  and  forwards  the  draft 
and  bill  of  lading.  G  is  bound  to  accept  or  pay  the  draft,  or  return  the  bill  of 
lading.  If  he  retains  the  bill  of  lading  without  accepdng  the  draft,  he  acquires 
no  added  right  in  the  goods  thereby ;  but  since  he  is  intrusted  by  F  with  the 
bill  of  lading,  he  could,  by  a  sale  to  an  innocent  purchaser,  confer  a  good  title 
as  against  F.  The  safe  course  is  to  forward  the  bill  of  lading  and  draft  to  a 
third  party,  as  a  bank,  with  instructions  to  deliver  the  bill  of  lading  to  G  only 
in  case  he  accepts  or  pays  the  draft. 

49.  Unascertained  goods.  The  following  rules  govern  the  courts 
in  determining  at  what  time  the  title  in  unascertained  goods  passes 
to  the  buyer  under  a  contract  of  sale. 

Rule  i.  Where  there  is  a  contract  for  the  sale  of  described 
but  unascertained  goods,  no  property  in  the  goods  is  transferred 
to  the  buyer  until  the  described  goods  are  ascertained  and  appro- 
priated to  the  contract  with  the  consent  of  both  parties. 

Exceptions  :  {a)  There  may  be  a  contract  of  sale  of  an  undivided  share  of 
specific  goods,  in  which  case  the  buyer  becomes  a  tenant  in  common  with  the 
seller  or  owner  of  the  remaining  undivided  portion.  For  example,  B  purchases 
one  half  the  wheat  in  C's  granary.  Tide  to  an  undivided  half  of  the  wheat 
passes  at  once  to  B.  {b)  There  may  be  a  sale  of  a  definite  measure  to  be  taken 
out  of  a  definite  mass  of  indefinite  measure.  This  case  differs  from  the  first 
in  that  the  sale  is  not  of  an  aliquot  portion,  as  one  half,  but  of  a  definite 
weight  or  measure  out  of  a  specific  mass  of  unknown  weight  or  measure,  as 


§49]  THE  TITLE  73 

6000  bushels  of  wheat  out  of  all  the  wheat  in  a  bin,  the  total  in  the  bin  being 
unknown.  The  buyer  becomes  owner  of  that  undivided  portion  represented  by 
the  ratio  of  6000  to  the  total ;  if  the  total  be  9000,  then  the  buyer  may  take 
title  to  an  undivided  two  thirds  from  the  time  of  the  making  of  the  contract. 
Two  remarks  are  to  be  made  upon  this  exception.  First,  it  applies  only  to 
what  are  called  fungible  goods,  that  is,  goods  like  wheat,  coal,  and  the  like, 
which  do  not  have  to  be  dealt  with  in  specie  but  by  weight  or  measure,  and 
not  to  goods  having  individual  characteristics,  like  horses.  Second,  even  as  to 
fungible  goods  the  exception  has  not  been  ever\-where  accepted,  many  juris- 
dictions insisting  that  title  cannot  pass  in  such  cases  until  the  6000  bushels 
have  been  separated  from  the  mass. 

Rule  2.  Where  there  is  a  contract  for  the  sale  of  unascer- 
tained goods  by  description,  and  goods  of  that  description  and  in 
a  dehverable  state  are  unconditionally  appropriated  to  the  contract, 
either  by  the  seller  with  the  assent  of  the  buyer  or  by  the  buyer 
with  the  assent  of  the  seller,  the  property  in  the  goods  passes  to 
the  buyer  at  the  time  of  such  appropriation.  Such  assent  may  be 
expressed  or  implied  and  may  be  given  either  before  or  after  the 
appropriation  is  made.  The  appropriation  must  be  final  and  un- 
conditional.   If  the  seller  may  substitute  other  goods,  it  is  not  final. 

Examples  .•  i .  B  orders  of  C  6000  bushels  of  wheat  of  a  specific  descrip- 
tion, the  same  to  be  measured  into  a  freight  car  on  the  siding  at  C's  warehouse. 
C  measures  6000  bushels  of  the  specified  description  into  the  car.  The  title 
passes  to  B  as  soon  as  the  appropriation  is  thus  completed. 

2.  B  buys  goods  of  C  from  sample.  C  sets  aside  in  his  store  goods  cor- 
responding with  the  sample,  and  marks  them  with  B's  name.  The  goods  are 
burned  and  C  sues  B  for  the  price.  If  the  appropriation  was  made  by  C  with 
B's  consent,  the  title  passed  and  B  is  liable.  But  if  the  appropriation  was  not 
final,  —  if  B  had  not  consented  to  this  form  of  appropriation,  —  the  title  was 
still  in  C,  and  B  is  not  liable.  This  involves  questions  of  fact  to  be  determined 
in  each  case. 

RuLK  3.  An  unconditional  delivery  of  the  goods  to  a  carrier, 
as  directed  by  the  buyer,  or  as  warranted  by  custom  and  usage, 
is  always  deemed  a  sufficient  appropriation  to  transfer  the  title 
to  the  buyer  ;  but  a  delivery  by  which  a  bill  of  lading  is  made  to 
the  order  of  the  seller,  or  is  retained  by  the  seller,  or  is  attached 
to  a  bill  of  exchange  drawn  upon  the  buyer,  may  not  pass  title. 
This  is  explained  in  Rule  6,  sect.  4H. 

Example  3.  B  orders  of  C  6000  bushels  f)f  wheat  of  a  specified  description. 
C  delivers  to  a  railway  carrier  6000  bushels  of  wheat  of  this  description  b-illed 


74  SALKS  OF  GOODS  [Cii.  IV 

to  B,  and  sends  B  the  bill  of  lading.  The  title  passes  to  B  as  soon  as  the 
delivery  to  the  carrier  is  complete.  But  if  the  bill  of  lading  reads  "  deliverable 
to  the  order  of  C,'"  the  title  will  not  pass,  because  C  has  thus  reserved  it  in 
himself.  Moreover,  if  the  contract  requires  the  seller  to  deliver  the  goods 
to  the  buyer  at  a  particular  place,  the  property  will  not  pass  until  the  goods 
have  reached  the  place  agreed  upon.  Thus,  B  orders  of  C  the  wheat  as  above, 
"  to  be  delivered  free  of  charge  at  my  warehouse  in  the  city  of  X."  The  title 
does  not  ])ass  until  the  wiicat  is  in  the  specified  warehouse. 

Rule  4.  If  goods  are  shipped  to  the  buyer  C.O.D.  (cash  on 
dehvcry),  under  the  Uniform  Sales  Act  and  prevailing  American 
rule  title  passes  to  the  buyer  at  the  time  of  delivery  to  the  carrier. 
The  seller  is  deemed  to  reserve  by  the  C.O.D.  clause  only  the 
right  to  po.sscssion  until  payment. 

50.  Who  has  the  risk?  Unless  otherwise  agreed,  the  goods 
remain  at  the  seller's  risk  until  the  title  passes  to  the  buyer.  As 
soon  as  the  title  passes  to  the  buyer  the  goods  are  at  the  buyer's 
risk,  whether  he  actually  has  possession  or  not.  Risk  follows 
title  is  the  rule  that  prevails  unless  the  parties  stipulate  to  the 
contrary.  In  determining  who  has  the  title  the  rules  given  above 
are  to  be  applied  in  the  absence  of  an  express  stipulation. 

Exception.  If  the  seller  delivers  the  goods  to  the  buyer,  but  by  the  terms 
of  the  sale  retains  tide  as  security  for  the  purchase  price,  the  goods  are  at  the 
risk  of  the  buyer.  For  example,  B  purchases  household  goods  of  C  upon  in- 
stallment payments,  and  it  is  agree4  that  the  tide  to  the  goods  shall  remain  in 
C  undl  they  are  actually  paid  for.  B  has  the  goods  in  his  house,  where  they 
are  accidentally  destroyed  by  fire.  B  must  pay  for  the  goods ;  the  risk  is  with 
him,  although  for  security  the  tide  is  with  C.  It  is  the  same  as  if  dtle  had 
passed  to  B  and  he  had  then  given  C  a  chattel  mortgage  on  the  goods  as 
security. 

He  who  has  title  also  has  the  right  to  any  gain  or  increase 
derived  from  the  article.  He  who  bears  the  risk  and  burden  is 
also  entitled  to  the  benefits. 

Example.  C  purchases  B's  flock  of  sheep  and  leaves  them  in  B's  posses- 
sion, delivery  and  payment  to  be  later.  B  shears  the  wool.  C  sues  B  for  its 
value.  C  may  recover.  The  dtle  passed  to  him  and  the  wool  is  his.  So  if 
lambs  are  born  of  these  sheep,  they  belong  to  C.  On  the  other  hand,  if  any  of 
the  sheep  die,  the  loss  falls  on  C. 


§§  51, 52]  PERFORMANCE  75 

III.    Performance 

51.  Duties  of  the  seller.  The  duties  of  the  seller  in  perform- 
ance of  his  contract  may  be  briefly  enumerated  as  follows  : 

1.  It  is  the  duty  of  the  seller  to  deliver  the  goods  in  accord- 
ance with  the  terms  of  the  contract.  Whether  he  is  to  send  them 
or  the  buyer  is  to  call  for  them  will  depend  upon  the  contract. 
If  nothing  appears  in  this  respect,  the  place  of  delivery  is  ordi- 
narily the  seller's  place  of  business  or  residence  or  the  place 
where  the  goods  are  at  the  time  of  the  sale.  If  no  time  is  fixed, 
a  reasonable  time  is  understood. 

2.  It  is  the  duty  of  the  seller  to  deliver  the  quantity  specified. 
If  he  delivers  less,  the  buyer  may  reject  them  ;  if  he  delivers 
more,  the  buyer  may  take  what  he  contracted  for  and  reject  the 
rest,  or  he  may  reject  the  whole.  The  buyer  is  not  bound  to  accept 
delivery  in  installments,  unless  he  has  agreed  to  do  so, 

3.  It  is  the  duty  of  the  seller  to  deliver  the  quality  specified. 
The  buyer  must  be  allowed  a  reasonable  opportunity  to  inspect 
the  goods,  if  he  did  not  inspect  them  when  he  purchased  them  ; 
and  he  is  not  deemed  to  have  accepted  them  until  he  has  had 
such  opportunity  of  examining  them  in  order  to  see  if  they  con- 
form to  the  contract.  He  is  deemed  to  have  accepted  them  when 
lie  intimates  that  fact  to  the  seller,  or  exercises  ownership  over 
them,  or  retains  them  without  dissent  after  the  lapse  of  a  reasonable 
time.  If  the  buyer  rightfully  rejects  the  goods,  he  is  not  bound  to 
return  them  to  the  seller,  but  must  permit  the  seller  to  take  them, 

4.  It  is  the  duty  of  the  seller  to  confer  upon  the  buyer  a  good 
title  to  the  goods. 

5.  It  is  the  duty  of  the  seller  to  make  good  all  representations 
and  warranties  expressed  or  implied  in  the  contract  of  sale.  This 
is  more  fully  explained  under  Warranties  post. 

52.  Duties  of  the  buyer.  The  duties  of  the  buyer,  after  a 
contract  of  sale  and  ])urc!iase  is  made,  are  as  follows  : 

I.  It  is  the  duty  of  the  buyer  to  accept  the  goods.  If  he 
refuses  to  do  so,  the  seller  may  sue  for  the  price  if  title  has 
passed  to  the  buyer,  or  if,  although  the  title  has  not  passed,  the 
goods  arc  not  readily  resaleable ;  or  the  seller  may  sue  for 
damages  for  failure  to  accept. 


76  SALES  OF  GOODS  [Ch.  IV 

2.  It  is  the  duty  of  the  buyer  to  pay  for  the  p:oods.  Unless 
otherwise  agreed,  dehvery  of  the  goods  and  payment  of  the  price 
are  concurrent  conditions.  If  the  price  is  agreed  upon,  that  must 
be  paid.  If  no  price  is  agreed  upon,  a  reasonable  price,  namely, 
the  market  price,  is  understood. 

IV.    Warranties 

53.  Definition  and  classification.  A  warranty  is  a  contract  of 
indemnity  made  by  a  seller  of  goods  in  favor  of  the  buyer,  to 
protect  the  latter  against  the  failure  of  one  or  more  terms  of  the 
contract  of  sale. 

A  warranty  may  be  either  express  or  implied. 

An  express  warranty  is  a  promise  or  affirmation  by  the  seller 
of  a  material  fact  concerning  the  goods  which  has  a  natural 
tendency  to  induce  the  buyer  to  purchase  them. 

An  implied  warranty  is  one  which  arises  from  the  acts  and 
conduct  of  the  parties,  or  from  custom  or  usage,  or  by  operation 
of  law. 

Examples  .•  i .  R  buys  goods  of  C,  who  assures  B  (that  is,  warrants)  that 
they  have  fast  colors.  This  is  an  express  warranty.  It  is  not  necessary  to  use 
the  word  "warrant"  or  "warranty."  If  the  colors  run,  there  is  a  breach 
of  the  warranty. 

2.  It  turns  out  that  C  did  not  own  the  goods.  There  is  a  breach  of  the 
implied  warranty  of  title  which  accompanies  every  sale  of  personal  property. 

3.  D  orders  of  E  a  quantity  of  goods  by  sample.  There  is  an  implied 
warranty  that  the  goods  when  received  shall  correspond'  with  the  sample. 

54.  Express  warranties.  The  express  warranty  is  gathered 
from  the  terms  of  the  contract.  If  the  contract  be  in  writing 
and  unambiguous,  the  construction  is  for  the  court.  If  the  con- 
tract be  by  parol,  the  construction,  unless  too  clear  for  any  dif-  ^ 
ference  of  opinion,  is  for  the  jury.  If  the  contract  is  in  writing, 
an  oral  express  warranty  cannot,  save  in  very  exceptional  cases, 
be  added  to  it.  If  the  seller  first  makes  statements  amounting 
to  warranties,  and  then  declares  he  will  not  warrant,  there  is  no 
warranty.  But  his  unexpressed  intention  not  to  warrant  will  not 
avail  him  if  he  uses  apt  words.  It  is  not  his  intention,  but  the 
impression  reasonably  produced  upon  the  mind  of  the  buyer  by 
his  words  or  conduct,  that  is  the  test. 


§  55]  WARRANTIES  77 

The  presence  of  an  express  warranty  will  not  exclude  an  implied 
warranty  unless  the  express  warranty  be  inconsistent  with  it. 

General  warranties  of  "  soundness  "  and  the  like  will  not  ordi- 
narily cover  specific  defects  obvious  to  the  buyer,  but  they  will 
cover  defects  about  which  a  buyer  expresses  doubt  after  an  ex- 
amination. A  particular  warranty  will  cover  a  particular  defect  if 
intended  to  do  so,  although  the  defect  may  be  patent. 

Expressions  of  opinion  or  "  puffs  "  do  not  amount  to  warranties. 

Examples  :  i.  B  in  selling  a  horse  says,  "  This  horse  is  sound."  There  is 
visible  a  large  bunch  upon  the  horse's  leg.  The  warranty  does  not  cover  this 
defect,  although  it  does  cover  other  defects  not  obvious. 

2.  A  buyer  in  looking  at  sheep  thinks  he  has  discovered  foot  rot.  The 
seller  assures  him  that  he  is  mistaken  and  v^rarrants  the  sheep  to  be  sound. 
The  general  warranty  covers  foot  rot. 

3.  "  These  sheep  will  sheer  from  six  to  ten  pounds  of  wool  a  head,  and 
you  can  pay  for  the  sheep  from  the  wool  in  two  years  "  is  a  mere  statement 
of  opinion,  or  "  puff,"  and  the  buyer  should  not  rely  upon  it.  So  also  the 
statement  "  This  is  an  A  No.  i  bond." 

55.  Implied  warranties.  The  following  are  the  principal  implied 
warranties  that  are  attached  to  a  contract  of  sale, 

1,  Warranty  of  title.  There  is  an  implied  warranty  by  the 
seller  that  he  has  a  right  to  sell  the  goods,  that  the  buyer  shall 
have  and  enjoy  quiet  possession  of  them,  and  that  they  shall  be 
free  from  any  charge  or  encumbrance  in  favor  of  any  third 
person  —  or,  in  other  words,  a  warranty  of  title.  If  this  warranty 
is  broken  and  the  buyer  deprived  of  the  goods,  he  may  recover 
the  purchase  price  paid,  with  interest. 

Exceptions.  This  does  not  attach,  however,  to  a  sale  made  by  a  sheriff  or 
other  person  who  sells  under  authority  of  law,  nor,  in  general,  to  a  sale  in 
which  the  seller  undertakes  to  transfer  only  such  property  as  he  or  the  person 
he  represents  may  have  in  the  goods ;  as,  for  example,  a  sale  by  an  assignee 
in  bankruptcy,  an  administrator  or  executor,  a  trustee,  or  a  mortgagee  under  a 
power  of  sale.   But  it  does  attach  to  the  ordinary  sales  in  the  business  world. 

2.  Sale  by  de.<;eriptiou.  (a)  In  the  .sale  of  goods  by  description 
there  is  an  implied  warranty  that  the  goods  shall  correspond 
with  the  description,  {b)  If  the  goods  are  bought  by  description 
from  a  seller  who  deals  in  goods  of  that  description,  there  is  an 
implied  warranty  that  the  goods  shall  be  of  merchantable  (luality. 


78  SALES  OF  GOODS  [Cn,  IV 

Examples:  i.  B  orders  of  C  "early  strap-leaf  red-top  turnip  seed"  for 
raising  turnips  for  market.  C  furnishes  seed,  which  B  plants.  The  crop  is 
laic  and  fit  only  for  cattle.  No  inspection  of  the  seed  by  B  could  reveal  that 
they  did  not  correspond  with  the  description.  B  has  an  action  against  C 
for  breach  of  the  implied  warranty  that  the  seed  should  correspond  with  the 
description.  It  is  immaterial  that  C  believed  that  the  seed  were  of  the  kind 
ordered.  B  may  recover  as  damages  the  difference  between  the  market  value 
of  the  crop  raised  and  the  market  value  of  the  one  he  would  have  raised  had 
the  seed  he  ordered  been  furnished. 

2.  B  orders  ice  of  C,  to  be  shipped  from  Maine  to  Boston.  There  is  an 
implied  warranty  that  the  ice  shall  be  of  merchantable  quality ;  but  if  B  has 
examined  the  ice  before  shipment,  there  is  no  implied  warranty  as  to  any 
defect  which  such  examination  ought  to  have  revealed. 

3.  Sale  by  sample.    In  a  sale  by  sample  there  is  an  implied 
warranty  (^7)  that  the  bulk  shall  correspond  with  the  sample  in 
quality,  and  (/;)  that  the  goods  shall  be  free  from  any  defect  ren- , 
dering  them   unmerchantable  which  would   not  be   apparent  on 
reasonable  examination  of  the  sample. 

Example  3.  B  ordered  of  C  certain  "corkscrew  worsted  coatings,"  to 
correspond  in  weight  and  quality  with  samples  supplied  B.  The  cloth  when 
made  up  into  coats  gave  way  at  the  seams,  owing  to  some  defect  in  the  manu- 
facture. The  bulk  corresponded  with  the  sample,  so  there  was  no  breach  of 
that  warranty ;  but  it  was  unfit  for  the  purpose  to  which  such  material  is  ordi- 
narily put,  and  this  was  a  breach  of  the  warranty  of  merchantability.  B  could 
not  reasonably  discover  this  defect  from  the  sample,  nor  indeed  from  the  bulk, 
until  the  cloth  was  actually  made  up  into  garments. 

The  buyer  must  be  given  a  reasonable  opportunity  to  compare 
the  bulk  with  the  sample,  and  in  sales  by  description  he  must 
have  reasonable  opportunity  for  inspection. 

There  may  be  in  the  same  sale  an  implied  warranty  as  to 
description  and  also  as  to  sample.  Such  was  the  case  in  the 
example  last  given.  The  goods  were  to  be  "corkscrew  worsted 
coatings  "  and  were  also  to  correspond  with  the  sample. 

4.  Fitness  for  particular  purpose.  Where  the  buyer  makes 
known  to  the  seller  the  particular  purpose  for  which  such  goods 
are  required,  relying  upon  the  seller's  skill  or  judgment,  there 
is  an  implied  warranty  that  the  goods  shall  be  reasonably  fit  for 
such  purpose. 

Examples :  4.  B  orders  of  C,  a  carriage  maker  and  repairer,  a  new  pole 
for  his  carriage.     The  pole  breaks,  owing  to  a  defect,  and  the  carriage  is 


§  56]  WARRANTIES  79 

damaged.  C  is  liable  to  B  for  the  damages.  There  is  a  breach  of  the  implied 
warranty  that  the  pole  shall  be  reasonably  fit  for  the  purpose. 

5.  B  orders  of  C,  a  manufacturer  of  cloths,  a  quantity  of  "  indigo  blue 
cloth."  B  is  a  woolen  merchant,  but  is  not  known  to  C  to  be  a  tailor.  B 
makes  the  cloth  up  into  liveries,  and  the  cloth  soon  shows  defects.  There  was 
no  implied  warranty  that  the  cloth  was  fit  for  that  purpose,  because  the  pur- 
pose was  unknown  to  the  seller.  There  might  be  a  breach  of  the  implied 
warranty  of  merchantability,  but  this  would  depend  upon  other  circumstances. 
Had  the  order  been  "  indigo  blue  cloth  suitable  for  liveries,'"  there  would  have 
been  an  implied  warranty  of  fitness. 

6  {Exception).  A  sale  of  a  specified  article  under  its  patent  or  other  trade 
name  does  not  carry  an  implied  warranty  for  any  particular  purpose.  An  order 
for  "your  Challenge  auger  outfit  for  boring  wells  "  is  fully  complied  with  when 
the  "  Challenge  auger  outfit "  is  furnished.  The  contract  assumes  that  the 
buyer  knows  what  are  the  character  and  capacities  of  this  article. 

5.  Sale  of  provisions.  The  above  rules  apply  to  the  sale  of 
provisions  under  the  Uniform  Sales  Act ;  but  in  some  jurisdic- 
tions there  is  a  special  implied  warranty  in  the  sale  of  provisions 
for  human  consumption,  namely,  that  they  are  wholesome  and  fit 
for  food.  This  is  put  on  the  ground  of  the  preservation  of  health 
and  life,  and  is  applied  even  where  the  buyer  sees  and  inspects 
the  article  before  purchasing.  Most  courts  recognizing  this  war- 
ranty at  all  limit  it  to  the  case  where  the  buyer  intends  to  consume 
the  article  and  the  seller  knows  this  fact ;  but  some  extend  it 
even  to  the  case  of  a  sale  by  a  wholesaler  to  a  retailer  who  intends 
to  resell  the  article.  In  no  case  is  the  doctrine  applied  to  the 
sale  of  food  for  animals. 

Example  7.  A  sells  meat  to  B,  a  retailer,  who  resells  it  to  C  for  domestic 
use.  Under  the  Uniform  Sales  Act  both  A  and  B  would  be  liable  on  an 
implied  warranty  of  fitness  for  use  as  food.  Some  courts  hold  that  there  is  an 
implied  warranty  of  wholesomeness  by  B  but  not  by  A.  If  either  A  or  B 
knew  the  meat  was  unwholesome,  he  would  be  liable  in  deceit  for  fraudulent 
concealment. 

56.  The  rule  of  caveat  emptor.  The  general  rule  in  the  law 
of  sales  is  that  of  caveat  eviptor,  "  let  the  buyer  beware."  This 
is  supposed  to  have  the  effect  of  making  men  self-reliant  and 
cautious,  and  of  decreasing  litigation. 

The  exceptions  to  the  rule  are  those  enumerated  under  the 
head  of  implied  warranties.  In  those  cases  the  seller  assumes 
the  risk  instead  of  the  buyer,  and  without  any  express  stipulation. 


80  SALES  OF  GOODS  [Cu.  IV 

In  all  other  cases,  if  the  buyer  does  not  wish  to  assume  the 
risk,  he  should  exact  an  express  warranty.  In  the  sale  of  specific 
chattels  examined  by  the  buyer  there  is  usually  no  implied  war- 
ranty except  as  to  title  ;  but  if  the  character  of  the  article  cannot 
be  ascertained  by  examination  (as  in  the  case  of  seeds),  there  is 
an  implied  warranty  that  the  article  shall  possess  the  necessary 
characteristics  of  such  articles. 

57.  Remedies  for  breach  of  warranty.  In  discussing  the  reme- 
dies for  breach  of  warranty  it  is  necessary  to  distinguish  between 
express  warranties  and  implied  warranties. 

1.  Express  xvarrcmties.  In  some  American  states  a  buyer  to 
whom  title  has  passed  cannot  rescind  the  sale  for  breach  of  an 
express  warranty.  He  is  confined  to  an  action  for  damages  for 
the  breach.  Under  the  Uniform  Sales  Act  and  in  some  other 
states  he  may  either  rescind  the  sale,  that  is,  return  the  goods 
and  recover  the  price,  or  he  may  keep  the  goods  and  sue  for  the 
breach  of  the  warranty.  The  reason  given  for  denying  the  right 
is  that  the  contract  of  warranty  is  collateral  to  the  main  contract 
of  sale,  and  its  breach  should  not  affect  that  contract.  If,  however, 
the  warranty  is  fraudulent,  that  is,  if  the  seller  knew  it  was  false, 
the  contract  may  be  afterwards  rescinded  for  the  fraud. 

If  the  title  has  not  passed  to  the  buyer,  he  may  refuse  to 
receive  the  goods  upon  discovering  a  breach  of  the  express 
warranty. 

Examples  .•  i .  B  sells  and  delivers  timber  to  C  and  innocently  warrants  it 
to  be  sound.  C  discovers  that  the  timber  is  unsound,  offers  to  return  it,  and 
demands  back  the  purchase  money.  He  then  sues  for  the  purchase  money.  In 
some  states  he  will  fail ;  he  can  recover  only  the  difference  in  value  between  the 
timber  as  warranted  and  as  it  was  in  fact.  Under  the  Uniform  Sales  Act  he  will 
succeed,  upon  returning  the  timber,  in  recovering  the  whole  purchase  money. 

2.  B  makes  the  warranty,  knowing  that  the  timber  is  unsound.  This  is 
fraud,  and  C  may  rescind  and  recover  the  whole  purchase  price. 

3.  E  sells  F  a  buggy  which  he  innocently  warrants  to  be  new  and  sound, 
and  agrees  to  repaint  the  wheels.  F  discovers  the  buggy  to  be  an  old  one 
and  unsound.  F  may  refuse  to  receive  it,  because  the  title  has  not  yet  passed 
to  him. 

2.  Implied  Warranties.  Under  the  Uniform  Sales  Act  the 
remedies  for  breach  of  an  implied  warranty  are  the  same  as  those 
for   breach    of   an    express    warranty.     In    England  and   a   few 


§5S]  REMEDIES  8 1 

American  states  the  term  "condition"  is  used  to  indicate  an 
obligation  regarding  the  goods  which  is  not  collateral  to  the  con- 
tract of  sale  but  is  a  vital  part  of  the  contract.  This  obligation 
is  also  sometimes  called  an  implied  warranty  in  these  jurisdictions. 
For  breach  of  a  condition  in  England  and  these  few  American 
states  the  buyer  may  at  his  election  either  (a)  rescind  the  sale 
and  recover  the  price  or  (/;)  receive  and  keep  the  goods  and  sue 
for  damages  for  the  breach  or,  in  case  the  price  is  unpaid,  set  up 
these  damages  to  diminish  the  price.  In  order  to  rescind,  the 
buyer  must  act  promptly  or  within  a  reasonable  time.  If  the  seller 
refuses  to  receive  the  goods  upon  a  rescission,  the  buyer  may 
hold  them  as  bailee  for  the  seller. 

Exainples :  4.  B  orders  goods  of  C  by  description.  When  the  goods 
arrive,  B  discovers  that  they  do  not  answer  the  description.  He  may  reject 
them  or  he  may  take  them  and  sue  for  damages  if  he  has  paid  the  price,  or 
deduct  the  damages  from  the  price  if  it  is  yet  unpaid. 

5.  (a)  B  orders  of  C  a  machine  for  a  particular  purpose.  B  sets  it  up  and 
finds  it  unfit  for  the  purpose.  B  may  reject  it  if  he  acts  with  promptness  after 
such  test,  or  he  may  keep  it  and  sue  for  damages  for  breach  of  the  implied 
warranty,  (d)  So  if  B  orders  a  chemical,  he  may  use  enough  of  it  to  determine 
whether  it  answers  the  description  ;  and  if  it  does  not,  he  may  reject  the 
remainder  without  being  required  to  pay  for  what  he  has  reasonably  used  in 
the  test,  (c)  But  if  he  can  determine  the  quality  without  using  any,  he 
waives  his  right  to  reject  the  bulk  by  consuming  any  portion  of  it. 

6.  The  damages  recoverable  upon  a  breach  are  all  the  losses  directly  and 
naturally  resulting  from  it.  B  orders  from  the  maker,  C,  a  refrigerator  suit- 
able for  keeping  dressed  poultry.  The  refrigerator  furnished  by  C  is  not  suit- 
able for  the  purpose,  and  the  poultry  spoil.  B's  damages  include  the  difference 
between  the  value  of  the  refrigerator  ordered  and  the  one  delivered,  and  also 
the  loss  incurred  by  the  spoiling  of  the  contents.  See  also  the  case  of  the  sale 
of  the  turnip  seed,  p.  83  au/e. 

V.    RemEDIE-S 

58.  Rights  of  unpaid  seller  against  the  goods.  Although  the 
title  to  the  goods  may  have  passed  to  the  buyer,  the  unpaid  seller 
is  entitled  to  the  following  rights  : 

I.  If  the  seller  is  still  in  possession  of  the  goods,  he  has  a 
lien  on  them,  or  a  right  to  retain  them  until  the  price  is  paid, 
unless  he  has  sold  on  credit  and  the  term  of  credit  has  not 
expired. 


82  SALKS  OF  GOODS  [Cm.  IV 

2.  If  the  seller  has  shipped  the  goods  and  he  afterwards 
learns  of  the  insolvency  of  the  buyer,  he  has  the  right  to  stop 
the  goods  /;/  transitu  before  they  reach  the  buyer,  and  thus 
regain  possession  of  them. 

3.  If  the  seller  has  a  lien  or  has  stopped  the  goods  ///  trmi- 
sitii,  as  above,  {a)  he  may  resell  the  goods  in  case  the  buyer 
delays  an  unreasonable  time  to  pay  for  them,  or  at  once  if  the 
goods  are  perishable,  and  if  they  sell  for  less  than  the  buyer 
agreed  to  pay  may  recover  from  him  as  damages  the  difference  ; 
or  {b)  he  may  rescind  the  sale  and  transfer  of  title,  and  may 
resume  the  title  himself  in  case  the  buyer  delays  an  unreasonable 
time  to  pay  the  price,  and  may  also  recover  from  the  buyer  as 
damages  any  loss  occasioned  by  the  buyer's  default. 

Seller's  lien.  The  seller's  lien  exists  when  he  has  sold  for 
cash  down  ;  or  when,  having  sold  on  credit,  the  term  of  credit 
has  expired  before  delivery ;  or  when,  having  sold  on  credit,  the 
buyer  becomes  insolvent  before  delivery.  He  loses  his  lien  by 
delivery  to  the  buyer  or  his  agent,  or  by  delivery  to  a  carrier  with- 
out reserving  in  the  bill  of  lading  the  right  to  possession,  or  by  a 
waiver  of  the  lien.  He  cannot  hold  the  goods  for  any  claim  except 
the  purchase  price,  nor  after  valid  tender  of  the  purchase  price. 

Stoppage  in  transitu.  Goods  are  in  transit  after  delivery  to  a 
carrier  and  before  delivery  to  the  buyer,  and  may  be  stopped  by 
the  unpaid  seller  in  case  the  buyer  becomes  insolvent.  The  transit 
ends,  however,  if  the  carrier  consents,  after  the  arrival  of  the 
goods  at  their  destination,  to  hold  them  for  the  buyer,  or  if  the 
carrier  wrongfully  refuses  to  deliver  them  to  the  buyer  upon 
demand.  The  unpaid  seller  exercises  his  right  of  stoppage  in 
transitu  by  giving  reasonable  notice  to  the  carrier.^  It  is  then 
the  duty  of  the  carrier  to  redeliver  the  goods  to  the  seller,  and  the 
duty  of  the  seller  to  pay  the  transportation  charges.  But  if  the 
carrier  has  issued  a  negotiable  bill  of  lading,  this  must  be  sur- 
rendered or  a  sufficient  bond  be  given  to  protect  the  carrier  from 

^  To  the  X.Y.  Railroad  Co  :  Circumstances  having  arisen  which  give  to  me 
the  right  of  stoppage  in  transitu,  I  hereby  direct  you  to  hold,  subject  to  my 
orders,  the  goods  delivered  to  you  on  Dec.  31,  1916,  at  Ithaca,  N.Y.,  and  con- 
signed to  John  Doe,  Buffalo,  N.Y.,  and  not  to  deliver  the  same  to  the  consignee. 

Ithaca,  N.Y.,  Jan.  5,  1917.  Richard  Roe 


§  59]  REMEDIES  83 

any  claim  arising  under  it.  If,  however,  such  negotiable  docu- 
ment of  title  has  actually  been  transferred  by  way  of  sale  to  an 
innocent  purchaser  for  value  while  the  goods  are  in  the  hands 
of  the  carrier,  and  before  the  seller's  right  has  been  exercised, 
his  right  of  stoppage  in  transitu  is  ended.  But  a  sale  of  the 
goods  by  the  buyer,  where  there  is  no  such  documentary  title, 
will  not  defeat  the  seller's  right. 

Resale.  The  seller's  right  of  resale  is  exercised  as  agent  by 
operation  of  law  for  the  buyer.  The  purchaser  at  the  resale  gets 
a  title  good  against  the  original  buyer.  Notice  of  the  intention 
to  resell  need  not  necessarily  be  given  to  the  buyer,  but  it  is 
always  safer  to  give  it.  Notice  of  the  actual  time  and  place  of 
the  resale  need  never  be  given. 

Rescission.  Notice  of  rescission  of  the  contract  and  retransfer 
of  title  to  the  seller,  or  some  overt  act  showing  an  intention  to 
rescind  (as,  for  example,  the  consumption  of  the  goods  by  the 
seller)  is  essential. 

Examples  .•  i .  B  sold  lumber  to  C  and  took  C's  note  for  thirty  days.  The 
lumber  remained  in  B"s  possession.  C  sold  the  lumber  to  D.  When  D  came 
for  it,  B  refused  to  deliver  it,  because  C  had  become  insolvent.  B  has  asserted 
a  valid  right.  Although  a  sale  on  credit  waives  a  lien,  the  lien  revives  if  the 
buyer  becomes  insolvent.    D  got  no  better  right  than  his  vendor  C  had. 

2.  B  sold  tobacco  to  C,  who,  unknown  to  B,  was  then  insolvent.  B  con- 
signed the  tobacco  to  C  and  sent  C  a  bill  of  lading.  C  failed  and  transferred 
the  bill  of  lading  to  D,  his  assignee  in  bankruptcy.  B  then  stopped  the  goods 
in  the  carrier's  hands.  D  claims  them.  In  this  case  B  will  get  the  goods.  An 
assignee  in  bankruptcy  is  not  a  purchaser  for  value,  as  he  parts  with  nothing. 
But  if  C  or  D  had  sold  and  delivered  the  bill  of  lading  to  E  before  B  stopped 
the  goods,  B's  right  would  have  been  gone. 

3.  B  sold  C  a  diamond  for  cash.  C  would  not  pay  cash  on  delivery  and 
B  retained  the  diamond.  Afterwards  B  sold  it  to  D  for  $40  less  than  C  had 
agreed  to  give.  B  may  recover  this  $40  of  C,  provided  he  sold  in  good  faith 
according  to  usage  and  for  the  highest  price  obtainable. 

4.  In  the  above  case  B  sold  the  diamond  for  530  more  than  C  had  agreed 
to  give.  C  claims  this  $30.  {a)\i  B  sold  as  agent  of  C,  he  should  account  to 
C  for  the  profits.  {/>)  If  B  rescinded  the  contract,  the  diamond  became  his  and 
he  is  entitled  to  the  enhanced  price ;  but  of  course  he  has  now  suffered  no 
damage  for  which  he  can  sue  C. 

59.  Rights  of  unpaid  seller  by  way  of  action  for  breach  of  con- 
tract. The  unpaid  .seller  has  the  following  remedies  against  the 
delinquent  buyer: 


84  SALES  OF  GOODS  [Cu.  IV 

1.  Action  for  till-  price.  If  the  property  in  the  goods  has  passed 
to  the  bluer,  the  seller  may  maintain  an  aetion  for  the  price ;  so 
also  if  by  the  terms  of  the  contract  the  price  is  to  be  paid  before 
the  property  in  the  goods  passes  to  the  buyer.  If  the  goods  are 
not  readily  resalal)le  at  a  reasonable  price,  the  seller,  upon  tender 
of  them  and  refusal  of  the  buyer  to  accept  them,  may  hold  them 
as  bailee  of  the  buyer  and  may  maintain  an  action  for  the  price. 

2.  Actio)i  for  damages  for  nonacccptancc.  If  the  buyer  unrea- 
sonably refuses  to  accept  the  goods,  the  seller  may  maintain  an 
action  against  him  for  damages  for  nonacceptance.  The  measure 
of  damages  is  the  loss  to  the  seller.  If  there  is  an  available 
market,  the  loss  is  the  difference  between  the  contract  price  and 
the  market  price. 

.Examples :  i.  C  sells  B  a  wagon  for  $50,  delivery  and  payment  to  be  one 
week  later.  Title  passes  to  B.  If  he  refuses  to  take  the  wagon,  C  may  sue 
and  recover  the  price.  Moreover,  if  B  refuses  to  take  the  wagon,  C  may, 
according  to  some-  authorities,  charge  him  for  the  storage  and  care  of  it. 

2.  C  agrees  to  build  a  wagon  for  B  according  to  a  certain  plan  and  descrip- 
tion. When  it  is  completed  according  to  the  contract,  C  tenders  it  to  B  and 
the  latter  refuses  it.  {a)  According  to  a  few  authorities  C's  only  remedy  is 
damages  for  breach  of  contract,  since  no  title  has  passed  to  B  and  the  wagon 
is  still  C's.  {b)  But  under  the  Uniform  Sales  Act  C  may  tender  the  wagon  to 
B  ;  title  will  then  pass,  and  C  may  sue  for  the  price. 

60.  Remedies  of  the  buyer.  The  buyer  may  be  the  owner  of 
the  goods  or  the  title  may  not  have  passed.  His  remedies  will 
be  more  numerous  in  the  former  case  than  in  the  latter. 

1.  Remedies  as  ozvjier.  If  the  property  in  the  goods  has  passed 
to  the  buyer,  and  the  seller  wrongfully  refuses  to  deliver  the  goods, 
the  buyer  may  treat  the  seller  as  having  converted  them.  This 
allows  the  buyer  to  replevin  the  goods,  thus  actually  getting  pos- 
session of  them,  or  to  sue  in  tort  for  conversion,  thus  getting 
their  value  in  money. 

2.  Action  for  damages  for  breach  of  contract.  If  the  property 
in  the  goods  has  not  passed  to  the  buyer,  and  the  seller  wrong- 
fully refuses  to  deliver  the  goods,  the  buyer  may  maintain  an 
action  for  damages  for  nondelivery.  The  measure  of  damages  is 
the  loss  resulting  naturally  to  the  buyer.  If  there  is  a  market, 
the  measure  is  ordinarily  the  difference  between  the  contract  price 
and  the  market  price  at  the  time  delivery  was  due  ;    these  are 


§60]  REVIEW  QUESTIONS  AND  PROBLEMS  85 

called  general  damages.  Damages  may  be  increased  by  knowledge 
communicated  to  the  seller,  at  the  time  the  contract  is  made,  of 
the  use  to  which  the  buyer  intends  to  put  the  goods  ;  these  are 
called  special  damages. 

Examples :  i.  B  purchases  of  C  1000  bushels  of  wheat  at  80  cents  a 
bushel,  to  be  delivered  September  i.  C  refuses  to  deliver  on  that  date,  and 
wheat  is  then  90  cents  a  bushel  in  the  same  market.  B"s  damages  are  i  o  cents 
per  bushel,  or  $100. 

2.  B  orders  of  C  a  shaft  to  replace  a  broken  one  in  his  mill,  and  notifies 
C  that  the  mill  must  be  idle  until  the  shaft  is  delivered.  C  agrees  to  deliver 
it  by  a  certain  date,  and  fails  to  do  so.  B  may  recover  as  special  damages  the 
loss  resulting  from  the  idleness  of  the  mill  while  he  is  with  due  diligence  pro- 
curing another  shaft  after  C's  failure  to  deliver  at  the  appointed  time.  Without 
such  notice  to  the  seller,  B's  damages  would  be  merely  the  difference  bet\veen 
the  price  he  agreed  to  pay  C  for  the  shaft  and  the  price  he  is  obliged  reason- 
ably to  pay  for  one  elsewhere. 

3.  B  bought  goods  of  C,  to  be  delivered  January  15,  informing  C  that  he 
wished  to  put  his  salesmen  on  the  road  on  that  date  w'ith  the  goods.  C  delayed 
delivery  and  in  consequence  B's  salesmen  were  idle  for  two  weeks.  B  may 
recover  the  loss  of  profits  on  resales  due  to  the  delay  of  C.  So  if  B,  to  C's 
knowledge,  had  resold  the  goods  to  D,  to  be  delivered  January  20,  and  had  to 
pay  damages  to  D  for  nondelivery,  he  could  recoup  these  damages  from  C. 
But  these  results  ensue  only  when  C  has  express  notice  of  the  use  to  which  B 
intends  to  put  the  goods  and  the  contract  is  made  in  contemplation  of  that. 

3.'  Action  for  breach  of  warranty.  This  has  already  been  dis- 
cussed (see  sect.  57  ante). 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  45.  Define  contract  of  sale  ;  executed  sale  ;  executory  sale.  What 
are  goods?  In  what  cases  may  a  buyer  get  better  title  than  the  seller  had? 
When  not?  Who  is  a  purchaser  in  good  faith  and  for  value?  Is  an  ante- 
cedent debt  value?  Distinguish  sale  and  barter.  How  may  the  price  be  fixed? 
What  is  a  bill  of  sale?  Draw  a  bill  of  sale  of  a  pair  of  horses,  buggy,  harness, 
whip,  lap  robe,  for  S3 50. 

Problem  i.  B,  in  the  name  of  C,  orders  goods  of  D,  who  supplies  them 
supposing  he  is  dealing  with  C.  After  B  gets  the  goods  he  sells  them  to  E, 
who  has  no  knowledge  of  B's  trick.  D  then  brings  an  action  to  recover  the 
goods  from  E.    Result? 

Problem  2.  B  is  induced  by  fraud  to  sell  and  transfer  goods  to  C.  whose 
creditors  then  seize  the  goods.  B  seeks  to  recover  the  goods  from  the 
creditors.     Can  he  do  so? 


86  SALES  OF  GOODS  [Cm.  IV 

Problem  j.  In  the  above  case  C  pledges  the  goods  to  a  creditor  as 
security  for  a  preexisting  debt.     Can  B  recover  them  ? 

46.  What  is  the  seventeenth  section  of  the  Statute  of  Frauds?  What 
are  "goods,  wares,  and  merchandise"?  Are  choscs  in  action  goods?  How 
can  you  tell  whether  a  contract  is  for  the  sale  of  goods  or  for  work  and 
labor?  State  the  different  tests.  Is  grass  realty  or  personalty?  What  differ- 
ence does  it  make?  What  constitutes  acceptance  and  receipt?  What  is  part 
payment?  What  should  the  note  or  memorandum  contain?  When  may  it 
be  made?    Write  a  contract  of  sale. 

rroblem  4.  C  agreed  orally  to  make  for  B  a  set  of  artificial  teeth  for 
^75,  and  B  agreed  to  pay  C  that  sum.  When  the  teeth  were  finished,  B 
refused  to  take  them.  C  sues  for  the  price.  B  pleads  the  Statute  of  Frauds. 
Result  ? 

Problem  ^.  B  orally  agrees  to  cut  and  deliver  to  C,  for  the  price  of  $15, 
certain  trees  standing  on  B's  land.  B  refuses  to  perform,  and  when  sued  sets 
up  the  Statute  of  Frauds.    Is  B  in  the  right? 

Problem  6.  B  examined  barrel  hoops  at  C's  factory  and  agreed  orally 
to  purchase  a  quantity  for  $200.  B  told  C  to  deliver  them  at  the  steamer 
Curlew  for  transportation.  C  delivered  them  at  the  steamer.  The  Curlew 
was  lost  at  sea  with  her  cargo.  C  sues  B  for  the  price.  B  sets  up  the 
Statute  of  Frauds.    Were  the  goods  "  accepted  and  received  "  by  B  ? 

Problem  7.  B  bought  a  carriage  of  C  for  $350,  but  it  remained  in  C's 
possession  and  there  was  no  payment  and  no  memorandum.  Some  changes 
were  ordered,  after  which  B  inspected  the  carriage  and  approved  it.  Later 
B  hired  a  team  of  horses  and  drove  out  in  the  carriage,  but  returned  it  to 
C's  warehouse.  He  then  refused  to  take  and  pay  for  it.  C  sues  B,  who 
pleads  the  Statute  of  Frauds.    Result? 

Problem  8.  B  goes  into  a  store  and  buys  on  credit  dress  goods  and 
trimmings  amounting  to  $  1 24.  Among  the  purchases  is  a  spool  of  thread  at 
five  cents.  B  takes  the  spool  of  thread  home.  Later  she  refuses  to  take  the 
goods  and  pleads  the  Statute  of  Frauds.    Result? 

Problem  g.  B  and  C  made  an  oral  contract  for  the  sale  and  purchase  of 
goods  of  the  value  of  $2500,  and  each  deposited  $200  in  the  hands  of  X, 
to  be  forfeited  by  the  party  who  should  refuse  to  perform  the  contract. 
B  refused  to  perform.  C  sues  B  for  breach,  and  B  pleads  the  Statute  of 
Frauds.     C  replies  that  there  was  part  payment.    Result? 

47.  Why  is  it  important  to  determine  when  title  passes?  What  are  specific 
goods?    What  are  unascertained  goods?    Illustrate. 

48.  State  the  general  rule  as  to  when  title  passes  in  the  sale  of  specific 
goods.     State  the  six  particular  rules.     Illustrate  each. 

Problem  10.  C  sold  to  B  lumber  which  the  parties  culled  out  and  agreed 
upon.    C  agreed  to  deliver  it  at  the  cars.    There  was  a  written  memorandum. 


REVIEW  QUESTIONS  AND  PROBLEMS  87 

While  still  in  C's  yard  the  lumber  burned.  C  sues  B  for  the  price.  Did  the 
title  pass  to  B  so  as  10  make  the  loss  his .'' 

Problem  11.  Sale  of  119  specific  bales  of  cotton  at  31!  cents  a  pound, 
payable  cash  on  delivery,  the  cotton  to  be  weighed  and  sampled  before 
delivery.  Seventy  bales  are  weighed  and  sampled,  but  not  delivered,  when 
the  whole  119  bales  are  destroyed  by  fire.  Is  the  buyer  liable  for  the 
1 1 9  bales .''    I  s  he  liable  for  the  70  bales  ? 

Problem  12.  X  sells  B  238  bags  of  coffee,  marked  and  designated,  but 
X  agrees  to  weigh  the  bags  in  order  to  ascertain  the  total  price,  the  sale 
being  by  the  pound.     Has  title  passed  to  B  ? 

49.  State  the  rules  to  determine  when  tide  passes  in  the  sale  of  unascer- 
tained goods.    What  are  fungible  goods.-'    When  is  an  appropriation  final? 

Problem  ij.  B  purchased  of  C  200  bushels  of  corn  out  of  a  lot  of  400 
to  500  bushels  in  C's  crib.  It  was  to  be  left  until  it  hardened,  and  then 
C  was  to  measure  and  deliver  it.  C's  creditors  levied  on  the  whole  lot. 
C  then  delivered  200  bushels  to  B,  and  the  creditors  seek  to  recover  the  corn 
from  B.    Result .? 

Problem  14.  In  the  above  case  the  crib  burns  and  all  the  corn  is 
destroyed.     Must  C  pay  B  for  the  200  bushels  ? 

Problem  /j.  Assume,  in  Problems  1 3  and  1 4,  that  C  has  agreed  to  deliver 
the  corn  and  that  B  sues  for  breach  of  this  promise.    May  he  recover? 

Problem  16.  C  orders  by  mail  a  barrel  of  shellac  of  B,  who  selects  a 
barrel  answering  the  descripdon  and  ships  it  to  C  by  the  X.  Ry.  as  directed. 
It  is  lost  in  transit.    May  B  maintain  an  action  against  the  X.  Ry.  for  its  loss? 

Problem  ij.  In  the  above  case  B  took  the  bill  of  lading  in  his  own  name 
and  retained  it.    Can  B  sue  the  X.  Ry.  for  the  loss? 

50.  Where  is  the  risk  of  loss  after  a  contract  of  sale?  Where  is  the 
right  to  gain  or  increase?  Do  these  rules  apply  to  a  sale  and  delivery  when 
the  seller  retains  title  as  security  for  payment? 

51.  State  the  duties  of  the  seller.  Where  is  delivery  to  be  made?  If  the 
buyer  orders  50  barrels  of  apples  and  the  seller  delivers  48  barrels,  must  the 
buyer  take  them?  How  is  it  if  the  seller  delivers  55  barrels?  If  the  seller 
delivers  50  barrels,  what  right  has  the  buyer? 

52.  State  the  duties  of  the  buyer. 

53.  Define  warranty  ;  express  warranty  ;  implied  warranty. 

54.  I)fx;s  an  express  warranty  arise  without  words?  Who  determines 
whether  there  is  an  express  warranty  ?    What  is  the  test  ?    What  is  a  "  puff  "  ? 

Problem  18.  B  sold  a  horse  to  C.  During  the  negotiaUons  B  represented 
the  horse  to  be  sound.  It  was  unsound.  C  sues  B  for  breach  of  warranty. 
B  objects  that  he  did  not  "warrant"  the  hor.sc.    Result? 

55.  State  the  implied  warranties  and  when  they  occur.  When  is  a 
warranty  of    title    not   implied?     When   is  there   a  warranty  that  goods  arc 


88  SALES  OF  GOODS  [Cn.lV 

merchantable?    Is  there  a  warranty  of  fitness  for  the  purpose  in  a  sale  by  a 
retailer?    Is  there  any  special  implied  warranty  in  the  sale  of  provisions? 

Problem  ig.  B  stole  a  horse  and  had  him  sold  at  aucdon.  C  bought 
at  the  auction  and  then  resold  the  horse  to  D.  The  true  owner  traced  it 
"and  recovered  it  from  D,  who  now  sues  C  for  breach  of  warranty  of  tide. 
Result? 

Froblcm  20.  B  sold  C  1 84  bales  of  hemp,  and  C  at  the  time  of  the 
sale  inspected  it  before  purchasing  by  opening  several  bales.  Most  of  it 
later  turned  out  to  be  bad.  C  sues  B  for  breach  of  implied  warranty. 
Result  ? 

Problem  21.  C  ordered  of  B  "  Calcutta  linseed."  It  came  mixed  with  rape 
and  mustard  seed.  All  linseed  has  some  such  seeds  mixed  with  it ;  this  had 
more  than  the  usual  quantity.  C  contends  that  the  contract  is  not  satisfied 
by  offering  this  article,  —  that  it  does  not  answer  the  description.  How 
would  you  hold? 

Problem  22.  B  bought  of  C  a  carload  of  cedar  posts,  to  be  shipped  by  C 
to  B.  When  they  arrived,  B's  servants  unloaded  a  part  of  them,  and,  dis- 
covering they  were  not  of  good  quality,  so  informed  B.  The  latter  then 
inspected  them  and,  because  they  were  not  of  good  quality,  replaced 
them  in  the  car,  and  refused  the  whole  lot.  C  sues  B  for  the  price.  Is 
B  liable? 

Problem  23.  C  bought  of  B  by  sample  "102  bales  second  quality  Ceard 
scrap  rubber  as  per  sample."  When  the  bales  arrived,  they  were  found  not 
to  be  second  quality,  but  inferior,  though  they  were  like  the  sample.  Is  C 
bound  to  keep  the  rubber  and  pay  for  it  without  offsetting  the  damages  for 
breach  of  warranty  ? 

Problem  24.  a.  A  manufacturer  sells  B  powder  for  blasting.  It  is  of 
poor  quality  and  unfit  for  the  purpose.     Is  there  a  breach  of  warranty? 

b.  A  dealer  who  purchased  of  the  manufacturer  sold  C  some  of  the 
same  powder  for  the  same  purpose.  Is  the  dealer  liable  to  C  for  breach  of 
warranty  ? 

56.  What  is  meant  by  the  rule  of  caveat  efnplorl  What  are  the  excep- 
tions to  the  rule?  If  A  sells  B  a  horse  without  express  warranty,  is  there 
any  implied  warranty?     If  A  sells  B  seeds? 

57.  Can  the  buyer  rescind  the  contract  for  a  breach  of  an  express  war- 
ranty if  tide  has  passed?  for  breach  of  an  implied  warranty?  If  goods  are 
ordered  by  descripdon  and  they  do  not  answer  the  description,  may  the 
buyer  take  them  and  sue  for  breach  of  implied  warranty? 

58.  State  all  the  rights  of  an  unpaid  seller  against  the  goods.  What  is 
the  seller's  lien?  How  is  it  lost?  What  is  the  right  of  stoppage  i?t  transitu} 
When  may  it  be  exercised?  How  is  it  lost?  Explain  the  exercise  of  the 
right  of  resale ;   of  rescission. 


REVIEW  QUESTIONS  AND  PROBLEMS  89 

Problem  2^.  B  sells  C  a  horse,  payment  and  delivery  to  be  one  week 
later.  At  the  time  fixed  C  does  not  take  or  pay  for  the  horse.  Explain  all 
the  remedies  to  which  B  may  resort  against  the  property  itself. 

Problem  26.  B  sells  C  a  horse  on  credit,  delivery  to  be  one  week  later 
and  payment  one  month  later.    What  are  B's  rights  against  the  property.'" 

59.  State  the  seller's  rights  against  the  buyer.  How  does  he  measure 
his  damages  for  a  breach.' 

60.  State  the  remedies  of  the  buyer  {a)  where  the  title  has  passed  and 
{b)  where  it  has  not  passed.  What  are  general  and  what  special  damages.' 
When  may  special  damages  be  recovered? 


CHAPTER  V 

BAILMENT  OF  GOODS 

61.  Definition  and  distinctions.  A  Ixiilmcnt '  of  goods  is  a 
transfer  of  the  possession  witliout  a  transfer  of  the  general 
ownership,  upon  a  contract,  expressed  or  impHed,  that  after 
the  purpose  of  the  transfer  shall  have  been  accomplished  the 
property  shall  be  redelivered  to  the  bailor  or  to  some  person 
designated  by  him. 

The  person  making  the  delivery  is  called  the  bailor.  The 
person  to  whom   it  is  made  is  called  the  bailee. 

Such  a  transfer  of  possession  usually  occurs  by  delivery  from 
the  bailor  to  the  bailee.  It  may  take  place,  however,  without 
such  delivery. 

Examples.  If  one  finds  an  article  and  takes  it  into  his  custody,  he  is  a 
bailee  for  the  unknown  owner,  although  there  has  been  no  delivery,  and  is 
under  an  obligation  created  by  the  law  to  return  it  to  the  true  owner  upon 
demand.  So  if  one  steals  or  converts  property  belonging  to  another,  he  is 
a  bailee,  and  the  law  creates  for  him  a  promise  to  return  it  to  the  owner.  So 
also  an  officer  who  seizes  goods  under  a  legal  process  is  a  bailee  of  the  goods. 
In  all  these  cases  there  is  a  transfer  of  possession  without  delivery,  but  in  all 
of  them  the  bailee  is  bound  to  deliver  up  the  property  either  upon  demand  or 
when  the  purpose  for  which  he  has  taken  it  is  accomplished. 

The  duty  of  the  bailee  is  usually  fixed  by  his  own  promise,  and  is  therefore 
the  result  of  contract.  But  in  the  cases  last  given  there  is  no  promise  and  no 
real  contract.  The  law  treats  these  cases  upon  the  fiction  that  there  is  a  promise ; 
that  is,  the  law  creates  the  promise  and  requires  the  bailee  to  return  the  goods 
or  pay  damages  for  withholding  them. 

The  consideration  for  the  bailee's  promise  is  the  detriment 
suffered  by  the  bailor  in  parting  with  his  property.  Sometimes 
the  bailor  furnishes  some  other  consideration,  as  when  he  pays 
or  promises  to  pay  the  bailee  for  caring  for  the  property  or 
doing  work  upon  it.  But  in  the  case  of  a  gratuitous  bailee 
(one   who    cares    for    the    property   without    compensation)    the 

^  "  Bailment "  is  from  the  French  bailler,  "  to  deliver." 
90 


§62]  CLASSIFICATION  91 

only  consideration  is  the  parting  with  the  property  by  the 
bailor.  This  is  an  act  which  the  owner  is  not  legally  bound  to 
do,  and  is  therefore  a  sufficient  consideration. 

Bailment  applies  only  to  personal  property.  This  may  be 
corporeal,  as  a  horse,  or  incorporeal,  as  a  document  of  title. 

The  bailor  need  not  be  the  true  owner  of  the  property.  One 
may  hire  a  horse  and  put  him  in  a  livery  stable ;  in  such  a 
case  there  are  two  bailments,  —  by  the  owner  to  the  hirer,  and 
by  the  hirer  to  the  livery-stable  keeper.  One  who  finds  a  jewel 
nvay  deliver  it  to  a  jeweler  to  be  tested  ;  in  such  a  case  the 
finder  is  bailor  and  the  jeweler  is  bailee,  and  the  finder  may 
recover  the  jewel,  or  its  value,  if  the  jeweler  refuses  to  sur- 
render it.    The  bailee  cannot  dispute  his  bailor's  title. 

DistJnc/ions.    A  bailment  must  be  distinguished  from  a  sale  or  barter. 

A  bailment  differs  from  a  sale  in  this :  in  a  sale  there  is  a  transfer  of  the 
general  ownership  or  title,  while  in  a  bailment  there  is  the  transfer  of  posses- 
sion for  a  particular  purpose,  the  general  ownership  or  title  remaining  in 
the  bailor. 

A  bailment  differs  from  a  barter  for  the  same  reason.  Further,  in  a  bail- 
ment the  identical  thing  is  to  be  returned,  though  sometimes  in  an  altered 
form,  while  in  a  barter  some  other  thing  is  to  be  returned.  If  one  delivers 
grain  to  be  ground  into  meal  and  the  meal  returned,  this  is  a  bailment ;  but 
if  one  takes  his  grain  to  a  mill  and  receives  therefor  meal  already  ground, 
this  is  a  barter,  or  sale.  If  one  "  lends "'  his  neighbor  a  bag  of  oats  to  feed 
the  neighbor's  horse,  this  is  a  barter,  because  the  same  oats  are  not  to  be 
returned,  but  a  like  quantity  of  oats;  this  is  technically  called  a  mutunm. 

Sometimes  there  is  a  bailment  with  an  option  to  purchase,  as  where  there 
is  a  "sale  on  approval  "  (see  page  76  ante).  In  such  case  the  transaction  becomes 
a  sale  wheti  the  bailee  signifies  his  approval. 

Sometimes  there  is  a  bailment  with  permission  to  mi.x  the  goods  with 
others  of  a  like  kind,  as  where  grain  is  placed  in  an  elevator  with  the  grain 
belonging  to  other  bailors.  The  owners  become  owners  in  common  of  the 
mass,  according  to  their  respective  shares.  If  there  is  no  such  permission, 
express  or  implied,  the  bailee  must  keep  the  bailor's  goods  separate  from 
his  own  or  others'. 

62.  Classification  of  bailments.  Bailments  fall  into  two  classes, 
and  each  has  subdivisions.  The  two  classes  arc  {A)  bailments 
solely  for  the  benefit  of  one  party,  and  (/>')  bailments  for  the 
mutual  benefit  of  both  parties. 

A.  Bailments  solely  for  the  benefit  of  one  party,  or  gratuitous 
bailments,  arc  divided  into  two  classes. 


92  RAILMKNT  [Ch.  V 

1 .  Bailments  for  the  sole  benefit  of  the  bailor  are  called  either 
a  deposit  (or,  in  the  Roman  law,  dcpositnvi)  or  a  mandate  (or, 
in  the  Roman  law,  mandatuvi).  These  are  bailments  in  which 
the  bailee  without  compensation  is  to  keep  the  property  of  the 
bailor  for  him  (deposit),  or  to  do  something  to  or  about  the 
property  for  the  bailor's  benefit  (mandate). 

Examples.  C  undertakes  without  reward  to  keep  D's  jewels.  C  without 
reward  undertakes  to  repair  D's  watch.  C  without  reward  undertakes  to 
carry  D's  grist  to  mill.    The  first  case  is  a  deposit.    The  others  arc  mandates. 

2.  A  bailment  for  the  sole  benefit  of  the  bailee  is  called  a 
covimodattim,  that  is,  a  gratuitous  loan.  This  is  a  bailment  in 
which  the  bailor  without  compensation  allows  the  bailee  to  use 
his  property. 

Examples.  D  loans  C  a  jewel  to  wear,  or  D  loans  C  his  horse  to  drive, 
without  compensation. 

B.  Mutual-benefit  bailments  may  be  divided  into  three  classes, 
with  two  additional  special  instances. 

1.  The  delivery  of  a  chattel  as  security  for  a  debt.  This  is 
called  a  pawn  or  pledge,  or  giving  of  collateral  security  (in  the 
Roman  law,  pignus). 

Examples.  D  borrows  money  of  C  and  delivers  his  watch  to  C  as  security. 
D  borrows  money  of  a  bank  and  delivers  bonds  or  shares  of  stock  as  collateral 
security. 

2.  The  delivery  of  a  chattel  to  the  bailee  to  be  used  by  him 
and  such  use  paid  for.  This  is  like  the  second  case  given  above, 
except  that  the  bailee  is  to  compensate  the  bailor.  It  is  called 
a  hiring,  or,  in  the  Roman  nomenclature,  locatio  rei  (the  hired 
use  of  a  thing). 

Examples.  D  loans  a  jewel  to  C  to  wear,  or  D  loans  his  horse  to  C  to 
drive,  in  each  case  for  a  stipulated  price. 

3.  The  delivery  of  a  chattel  to  the  bailee  to  keep  safely,  or 
to  do  work  upon,  for  a  compensation.  This  is  like  the  first  case 
given  above,  except  that  the  bailee  is  to  be  paid  instead  of  act- 
ing gratuitously.  This  is  called  a  hiring  (of  services)  or,  in  the 
Roman  nomenclature,  locatio  operis  (hired  services  about  a  thing). 
There  are  three  special  instances  of  this  :    {a)   hired  custody  of 


§63]  FOR  BENEFIT  OF  ONE  PARTY  93 

a  thing  {locatio  aistodiae)  ;  {b)  hired  services  upon  a  thing 
{locatio  opcris  faciendi)  ;  (r)  hired  carr)'ing  of  a  thing  {locatio 
operis  viercinni  vehendamvi). 

Examples.  C  undertakes  for  a  price  to  keep  D's  jewels  safely.  C  for  a 
price  undertakes  to  repair  D's  watch.  C  for  a  price  undertakes  to  carry  D's 
grain  to  mill. 

The  following  special  cases  of  delivery  for  safe-keeping  or  for 
transportation  fall  under  mutual-benefit  bailments  but  call  for 
separate  treatment. 

1.  Innkeepers,  The  intrusting  of  goods  to  the  protection  of  an 
innkeeper  by  a  guest  at  the  inn  gives  rise  to  peculiar  liabilities. 

2.  Common  carriers.  The  delivery  of  goods  by  a  shipper  to  a 
common  carrier  for  transportation  gives  rise  to  peculiar  liabilities. 

The  following  special  cases  do  not  fall  strictly  under  bailment 
but  may  be  treated  here  for  convenience. 

1,  Public  carriers  of  passengers  and  baggage. 

2.  Telegraph  and  telephone  companies. 

The  classification  of  bailments  may  be  summarized  as  follows : 


Classificatiox  of  Bailments 

A.  Gratuitous.  B.    Mutual-benefit. 

1.  Gratuitous  services.  i.   Pledge,  or  pawn. 

a.  Deposit.  2.  Hired  use  of  a  thing. 

b.  Mandate.  3.  Hired  services  about  a  thing. 

2,  Gratuitous  loans.  a.  Custody   of    a    thing   (with   special 

case  of  innkeepers). 

b.  Work  upon  a  thing. 

c.  Transportation    of    a    thing    (with 

special  case  of  common  carriers). 

T.    Bailments  solely  for  Bknefit  of  One  1'aktv 

• 

63.  Bailments  for  sole  benefit  of  bailor.  These  bailments  lay  on 
the  bailee  the  lightest  duties,  since  he  derives  no  benefit  from  them. 

I.  Ho7i>  created.  This  bailment  may  be  created  by  contract,  as 
where,  upon  the  bailee's  promise  to  care  for  the  article  gratuitously, 
the  bailor  delivers  it  to  the  bailee.  Some  writers  do  not  regard 
this  strictly  as  contract,  because  the  only  consideration   for  the 


94  BAlLiMKNT  \ru.V 

promise  is  the  partiii}:^  with  possession  by  the  promisee.  iL  is, 
however,  convenient  to  treat  the  relation  as  the  result  of  contract. 

This  bailment  may  also  be  created  by  a  voluntary  undertaking 
of  the  bailee  without  any  action  on  the  part  of  the  bailor,  as, 
for  example,  where  one  finds  lost  property  and  takes  it  into  his 
possession. 

It  may  also  be  created  without  a  voluntary  undertaking^  of  the 
bailee,  as  where  goods  are  cast  by  a  flood  or  other  force  of  nature 
upon  the  lands  of  the  bailee. 

2.  Bailor  s  obligations.  As  these  are  gratuitous  bailments,  the 
bailor  is  not  bound  to  compensate  the  bailee  for  his  services  in 
the  care  of  the  property  or  for  any  work  done  upon  it ;  but  if 
the  bailee  has  not  by  agreement  undertaken  to  bear  unusual  ex- 
penses, the  bailor  must  indemnify  him  for  such  actual  disburse- 
ments. The  voluntary  bailor  is  also  bound  to  warn  the  bailee 
of  any  danger  of  which  the  former  is  aware,  if  such  danger  in- 
creases the  ordinary  risk  of  the  bailment  and  is  not  apparent  to 
the  bailee.  * 

Examples:  i.  C  undertakes  without  compensation  to  keep  and  feed  D's 
dog.    C  is  obliged  to  pay  a  dog  tax.    D  must  reimburse  C. 

2.  C  undertakes  without  compensation  to  take  and  care  for  D's  dog. 
Known  to  D  but  unknown  to  C  the  dog  is  vicious.  C  is  bitten  by  the  dog. 
D  is  liable  to  C  for  the  injury.  But  D  would  not  be  liable  if  he  did  not  know 
of  the  vicious  propensities  of  his  dog  or  if  he  warned  C  of  them. 

3.  Duties  of  bailee.  The  bailee  is  not  bound  to  undertake  the 
bailment  even  after  he  has  promised  to  do  so.  This  is  because 
there  is  no  consideration  for  his  promise,  since  the  bailor  has 
promised  him  nothing  in  return.  But  if  the  bailee  does  undertake 
the  bailment  by  receiving  the  goods,  he  then  comes  under  certain 
obligations  to  the  bailor. 

a.  The  bailee  must  not  by  gross  negligence  injure,  destroy, 
or  lose  the  goods.  It  is  said  that  since  the  bailee  is  acting  gra- 
tuitously, he  is  bound  to  use  only  slight  care  toward  the  subject 
of  the  bailment  and  is  liable  only  for  gross  negligence.  What- 
ever this  may  mean, — and  it  is  a  matter  difficult  to  define  accu- 
rately, —  it  is  clear  that  less  care  is  exacted  of  the  gratuitous 
bailee  than  of  any  other.  The  amount  of  care  must,  however, 
vary  in  proportion  to  the  risk. 


§6+]  FOR  BENEFIT  OF  ONE  PARTY  95 

Example  3.  More  care  would  be  required  in  the  keeping  of  a  diamond 
than  in  the  keeping  of  a  plow ;  more  skill  and  care  would  be  required  in  the 
repairing  of  a  watch  than  in  the  repairing  of  an  umbrella.  The  court  instructs 
the  jury  that  the  gratuitous  bailee  is  required  to  use  only  slight  care  and  is 
liable  only  for  gross  negligence,  that  this  is  the  care  that  persons  of  less  than 
ordinary  prudence,  but  still  of  prudence,  exercise  under  like  circumstances, 
and  that  whether  the  bailee  exercised  this  care  in  the  case  in  litigation  is  a 
question  of  fact  for  the  jury  to  determine. 

/;.  The  bailee  must  not  use  the  article  except  so  far  as  its  use 
is  reasonable  or  necessary  for  its  proper  care.  The  bailee  might 
drive  a  horse  to  keep  it  in  health,  or  milk  a  cow ;  but  he  could 
not  use  the  horse  for  plowing  his  own  field,  or  wear  a  diamond 
intrusted  to  him. 

c.  The  bailee  must  redeliver  the  article  at  the  termination  of 
the  bailment,  together  with  any  increase  or  profit  derived  from  it. 
If  it  has  been  lost,  the  bailee  is  liable  only  if  the  loss  was  due 
to  his  gross  negligence. 

Examples :  4.  B  undertakes  gratuitously  to  keep  C's  furs.  He  keeps  them 
so  negligently  that  the  moths  injure  them.  B  is  not  liable  unless  this  is  found 
to  be  gross  negligence. 

5.  B  wears  the  furs  and  loses  them.  B  is  liable.  He  had  no  right  to  use 
the  furs,  and  in  doing  so  assumed  the  entire  risk  of  their  safety. 

6.  B  undertakes  gratuitously  to  keep  C's  jewels.  B  locks  them  up  in  his 
desk.  Burglars  break  open  the  desk  and  steal  the  jewels.  B  is  not  liable  unless 
he  was  grossly  negligent,  which  could  hardly  be  the  case  under  these  facts. 

7.  B  leaves  the  jewels  in  an  unlocked  drawer  and  they  are  stolen.  This 
might  be  gross  negligence. 

4.  Temiination  of  bailment.  The  bailment  is  terminated  when- 
ever either  party  elects  to  terminate  it.  This  is  perhaps  subject 
to  the  qualification  that  if  the  bailee  has  entered  upon  some 
work  to  be  done  upon  the  article,  he  is  bound  to  finish  it.  The 
death  of  either  party  terminates  the  bailment.  So  also  does  the 
insanity  of  cither. 

64.  Bailments  for  bailee's  sole  benefit.  These  bailments  lay 
on  the  bailee  the  heaviest  duties,  since  he  alone  benefits  from 
them. 

I.  How  created.  This  form  of  bailment  arises  only  by  con- 
tract, because  it  requires  the  assent  of  the  bailor  to  lend  and  the 
assent  of  the  bailee  to  borrmv.    A  promise  to  lend  is  not  binding, 


96  BAILMENT  [Cu.  V 

because  there  is  no  consideration  for  it ;  but  after  the  loan  is 
made,  the  contract  is  complete.  The  absence  of  compensation  to 
the  bailor  characterizes  this  class  of  bailments. 

2.  Obligations  of  bailor.  The  sole  obligation  of  the  bailor  is 
to  warn  the  borrower  of  any  defect,  known  to  him  and  not  known 
or  obvious  to  the  bailee,  which  renders  the  article  dangerous.  If 
he  does  not,  and  the  bailee  is  injured  in  consequence  of  such 
defect,  the  bailor  is  liable  to  him  for  the  injury. 

Example  i.  B  lends  his  horse  to  C  to  drive.  Known  to  B  but  unknown 
to  C,  the  horse  is  a  runaway.  If  B  does  not  warn  C  of  this,  and  the  horse 
runs  away  and  injures  C,  B  is  liable. 

3.  Duties  of  the  bailee.  The  obligations  of  the  bailee  may  be 
fixed  by  the  contract  itself.  Where  they  are  not  specified,  the 
following  will  be  implied. 

a.  The  bailee  must  exercise  great  care  in  keeping  or  using 
the  article,  and  is  liable  for  slight  negligence.  The  bailment 
being  for  the  bailee's  sole  benefit,  the  law  exacts  of  him  greater 
care  than  in  the  case  of  any  other  bailee.  He  is  not  liable  for 
inevitable  accident  but  only  for  such  injuries  as  by  the  exercise 
of  great  diligence  he  could  have  prevented.  In  the  presence 
of  any  danger  he  ought  to  prefer  the  safety  of  the  borrowed 
article  to  the  safety  of  his  own  property.  In  this  respect  this 
bailment  is  at  the  opposite  extreme  from  the  one  for  the  bailor's 
sole  benefit. 

Exajnple  2.  C  loans  B  his  watch.  B  loses  it.  If  this  was  due  to  a  want 
of  great  care  (more  than  one  ordinarily  takes  of  his  own  property),  B  is  liable 
to  C.    This  is  a  question  for  the  jury  under  proper  instructions. 

b.  The  bailee  may,  of  course,  use  the  article,  but  he  must  not 
lend  it  to  others  unless  it  is  understood  that  he  may  do  so,  and 
must  use  it  in  accordance  with  the  contract  or  understanding. 
Any  material  deviation  may  cast  upon  him  the  liability  of  insuring 
the  safety  of  the  article  or  may  render  him  liable  in  tort  for  its 
conversion. 

Exatnples :  3.  C  borrows  D's  horse  to  drive,  to  A,  and  drives  instead  to  B 
in  another  direction.  The  horse  dies  without  C's  fault.  C  must  pay  for  the 
horse.  He  has  technically  converted  it  and  is  absolutely  liable.  If  the  horse 
had  died  without  Cs  fault  while  he  was  driving  to  A,  he  would  not  have  been 
liable. 


§65]  FOR  MUTUAL  BENEFIT  97 

4.  C  borrows  D's  horse  to  drive  and  permits  E  to  drive  it.  C  is  absolutely 
liable  for  any  injury  to  the  horse  while  in  E's  hands.  But  it  may  be  implied 
that  another  is  to  use  the  article.  If  C  takes  D's  horse  in  order  to  try  him 
before  buying,  C  may  permit  a  competent  horseman  to  make  the  test. 

c.  The  bailee  must  redeliver  the  article  with  its  increase  or 
profits.  He  cannot  deny  his  bailor's  title  ;  that  is,  he  cannot  hold 
the  article  under  a  claim  that  it  is  his  or  another  person's,  but 
must  return  it  and  resort  to  an  action  to  establish  his  claim. 

Examp/es :  5.  C  borrows  D's  bonds  to  pledge  in  order  to  raise  money. 
C  must  return  the  bonds  and  also  any  income  accruing  during  the  loan. 

6.  C  borrows  D's  team  and  refuses  to  return  it,  alleging  that  it  belongs  to 
his  wife,  a  sister  of  D.  This  is  not  a  good  defense.  C  must  return  the  team, 
and  the  wife  can  then  bring  an  action  to  recover  it.  C  cannot  thus  dispute  his 
bailor's  title. 

4.  Termination  of  bailment.  A  bailment  in  the  nature  of  a 
loan  may  be  terminated  at  the  will  of  the  borrower.  Whether,  if 
it  be  for  a  definite  time,  the  lender  may  recall  it  before  the  time 
has  elapsed  is  a  doubtful  question.  Any  violation  of  the  borrower's 
duty  toward  the  article  justifies  the  lender  in  recalling  it.  The 
death  of  the  borrower,  or  his  insanity,  terminates  the  bailment. 
The  death  or  insanity  of  the  lender  may  not,  possibly,  terminate 
a  loan  for  a  definite  period  if  that  period  has  not  yet  elapsed. 

II.    MuTiAL-BENF.nT  Railmpznts 

65.  Pledge  or  pawn.  This  is  a  mutual-benefit  bailment  intended 
as  a  species  of  security  ;  and  when  it  is  a  bank  transaction  with 
stocks,  bonds,  or  other  like  instruments  pledged,  it  is  called 
collateral  security. 

I.  Hozv  created.  A  pledge  or  pawn  is  a  bailment  of  a  chattel 
as  security  for  a  debt  or  other  legal  obligation,  and  is  usually  ac- 
companied by  a  power  in  the  bailee  to  sell  the  article  in  case  of 
default.  When  a  transaction  is  on  a  larger  scale,  the  bailment  is 
often  called  the  giving  of  collateral  security,  as  where  one  borrows 
money  at  a  bank  anrl  deposits  bonds  as  security  for  the  loan. 
The.se  transactions  by  way  of  pledge  can  arise  only  by  contract. 
The  statutes  generally  regulate  somewhat  strictly  the  business  of 
pawnbrokers,  and  prescribe  the  rate  (jf  interest  they  may  lawfully 


98  BAILMENT  [Ch.  V 

charge  for  loans  secured  by  pledge.  Delivery  to  the  pledgee  is 
essential  to  the  creation  of  a  pledge.  The  delivery  of  documents 
of  title,  like  warehouse  receipts  or  bills  of  lading,  constitutes  a 
pledge  of  the  property  they  represent.  Stock  certificates  should 
be  accompanied  by  a  power  to  transfer  the  title  upon  the  books 
of  the  corporation  that  issued  them. 

•  2,  Rights  and  obligations  of  pledgor.  A  pledgor  of  property 
impliedly  warrants  that  he  has  good  title  to  it  and  is  liable  to  the 
pledgee  for  a  breach  of  this  warranty  if  the  pledgee  is  damaged 
thereby.  He  has  a  right  to  assign  to  another  his  interest  in  the 
pledged  article,  that  is,  the  difference  between  its  value  and  the 
sum  for  which  it  is  pledged.  lie  has  a  right  to  redeem  the  pledge 
by  payment  of  the  debt  which  it  secures.  No  agreement  of  the 
parties  can  make  the  pledge  irredeemable,  because  this  is  regarded 
by  the  law  as  oppressive  to  the  debtor,  who  usually  gives  a  pledge 
under  the  stress  of  necessity. 

3.  Rig/its  and  duties  of  pledgee.  The  pledgee  has  a  right  to 
assign  his  interest  in  the  pledge.  He  has  no  right  to  use  the 
pledged  article  except  so  far  as  its  use  is  necessary  to  its  proper 
care.  Any  profits  derived  from  it  the  pledgee  holds  to  apply  toward 
the  debt ;  but  if  that  is  otherwise  paid,  he  must  account  for  them 
to  the  pledgor.  He  is  to  be  reimbursed  for  any  expenses  neces- 
sarily incurred  in  caring  for  the  article  pledged.  He  must  use 
ordinary  care  in  keeping  and  preserving  the  property,  and  is  liable 
for  ordinary  negligence.  This  case  lies  midway  in  this  respect 
between  the  bailment  for  the  bailor's  sole  benefit  and  that  for  the 
bailee's  sole  benefit.  He  must  redeliver  the  property  when  the 
pledge  is  redeemed  by  the  pledgor. 

After  the  debt  is  due  and  unpaid,  the  pledgee  may  sell  the 
property  to  pay  the  debt,  and  must  pay  to  the  pledgor  any  sur- 
plus above  the  debt,  interest,  and  expenses  of  sale.  If  there  is  no 
provision  in  the  contract  permitting  a  private  sale,  the  sale  must 
be  at  public  auction  after  due  notice  to  the  pledgor ;  but  it  is  often 
held  that  stocks  and  bonds  may,  after  due  notice,  be  sold  on  the 
floor  of  the  stock  exchange.  The  pledgee  cannot  purchase  at  his 
own  sale.  In  the  absence  of  an  express  provision  in  the  contract 
prescribing  the  mode  of  sale,  and  especially  where  notice  cannot 
be  given  to  the  pledgor,  or  where  there  are  conflicting  claims,  it 


§66]  FOR  MUTUAL  BENEFIT  99 

is  safer  for  the  pledgee  to  secure  a  judicial  sale  under  a  decree 
of  a  court  of  equity.  In  some  states  the  statute  provides  for  the 
manner  of  sale  of  pledged  property. 

4.  Termination  of  pledge.  A  pledge  is  terminated  when  the 
property  is  redelivered  to  the  pledgor,  or  when  by  tender  or  pay- 
ment of  the  debt  the  pledgor  is  entitled  to  have  it  redelivered. 
A  refusal  to  redeliver  the  property  when  the  pledgor  is  entitled 
to  it  renders  the  pledgee  liable  in  tort  for  conversion. 

Examples  :  i.  A  pledges  a  jewel  to  B  as  security  for  a  loan.  B  leaves  the 
jewel  at  night  in  a  show  case.  Burglars  enter  and  take  it.  B  is  liable  to  A 
for  the  loss  if  it  is  found  that  B  did  not  use  due  or  ordinary  care  for  the  safe- 
keeping of  the  jewel.    Due  care  might  require  B  to  put  the  jewel  in  a  safe. 

2.  B  wears  the  jewel  and  it  is  lost.  B  is  liable  to  A,  for  he  assumed  the 
risk  in  wearing  the  jewel. 

3.  A  pledged  securities  to  a  bank  for  the  payment  of  a  particular  loan. 
A  paid  the  loan  and  demanded  the  securities.  The  bank  refused  to  deliver 
them  and  claimed  to  hold  them  for  another  unsecured  loan.  A  brought  an 
action  against  the  bank  for  conversion  of  the  securities  and  recovered.  The 
bank  could  hold  the  securities  for  the  particular  loan,  but  for  no  other. 

4.  The  bank  received  dividends  on  the  securities.  These  belong  to  A  after 
he  pays  the  loan,  or  they  may  be  deducted  from  the  loan  and  payment  made 
of  the  balance. 

5.  A  received  dividends  on  the  securities.  He  holds  them  in  trust  for  the 
bank  until  the  loan  is  paid. 

6.  A  pledgee  upon  default  sold  the  pledge  under  authority  given  by 
the  pledgor  and  purchased  at  his  own  sale.  The  sale  may  be  avoided  at  the 
election  of  the  pledgor. 

Pawnbrokers.  In  New  York  pawnbrokers  may  take  3  per  cent  a  month 
for  the  first  six  months  and  2  per  cent  a  month  thereafter  upon  loans  not  ex- 
ceeding Si 00,  and  2  per  cent  a  month  for  the  first  six  months  and  i  per  cent 
a  month  thereafter  upon  loans  exceeding  5 100.  They  cannot  sell  pawns  until 
one  year  after  possession  thereof,  and  the  sale  must  be  at  public  auction  and 
conducted  by  a  licensed  auctioneer.  Notice  of  the  sale  must  be  published  for 
at  least  six  days  in  two  daily  newspapers.  Any  surplus  on  the  sale  shall  be 
turned  over  to  the  pledgor.  In  Massachusetts  the  mayor  and  aldermen  or 
other  licensing  board  of  a  city  may  fix  the  rate  of  interest,  and  articles  may  be 
sold  at  public  auction  after  four  months. 

66.  Bailee  hires  an  article  of  bailor.  This  is  also  a  niuUial- 
bcncfit  bailment,   since  both   parties  derive  a  benefit  from   it. 

I.  Hoiv  created.  This  bailment  arises  only  by  contract.  The 
bailor  agrees  to  deliver  to  the  bailee  an  article  to  be  used  by  the 
latter,  who  in  turn  agrees  to  jjay  the  bailor  a  comix-nsation   for 


lOO  BAILMENT  [<-'"•  V 

such  use.  If  the  bailor  refuses  to  deHver  or  the  bailee  to  receive, 
there  is  a  breach  of  contract  for  which  damages  may  be  recovered. 
When  a  delivery  is  actually  made  and  accepted,  the  bailment  begins, 

2.  Rig/its  and  liabilities  of  bailor.  The  bailor  warrants  his  title 
and  warrants  that  the  bailee  shall  not  be  disturbed  in  his  posses- 
sion by  one  maintaining  a  superior  title.  He  must  warn  the  bailee 
of  any  defects,  known  to  him  and  not  observable  by  the  bailee, 
which  render  the  article  dangerous  for  the  purpose  for  which  it 
is  hired.  So  also  the  bailor  must  use  due  care  to  discover  and 
remedy  defects. 

Example  i .  B  lets  to  C  a  horse  and  carriaji^e,  and  the  carriage  breaks  down 
and  injures  C  from  a  defect  which,  by  the  use  of  due  care,  B  might  have 
discovered.    B  is  Hable  to  C. 

3.  Rights  and  duties  of  bailee.  The  rights  and  duties  of  the 
bailee  may  be  fixed  in  part  by  the  contract.  In  the  absence  of 
contract  provisions  the  following  general  rules  would  govern. 

a.  The  bailee  must  exercise  ordinary  care  in  the  keeping  and 
use  of  the  article,  and  is  liable  for  ordinary  negligence.  Ordinary 
care  is  that  which  the  average  prudent  man  exercises  under  like 
circumstances  in  the  conduct  of  his  own  affairs.  The  bailee  is 
not  liable  for  inevitable  accident  nor  for  any  willful  act  of  a  third 
person.  He  is  liable  only  for  negligence ;  that  is,  the  want  of 
that  ordinary  care  on  his  part  which  naturally  and  probably  results 
in  injuring  the  article. 

b.  The  bailee  acquires  the  right  to  the  exclusive  use  of  the 
article  during  the  time  specified.  He  may  maintain  an  action  for 
any  disturbance  of  his  lawful  possession  and  is  said  to  have  a 
special  property  in  the  goods.  He  must  use  the  article  with  due 
care  and  only  for  the  purpose  or  in  the  manner  agreed  upon.  If 
he  hires  a  horse  to  drive  to  A,  he  must  not  drive  elsewhere  or 
beyond  A.  An  intentional  material  variation  from  the  terms  of 
the  contract  may  amount  to  a  conversion  and  render  the  bailee 
absolutely  liable  for  the  safe  return  of  the  chattel. 

Examples :  2.  A  hires  B's  horse  to  drive  to  X.  He  does  drive  to  X,  but 
by  a  very  circuitous  and  unusual  roufe.  This  may  be  a  technical  conversion 
and  render  A  liable  for  any  injury  to  the  horse  while  so  converted. 

3.  A  overdrives  the  horse  and  injures  it.  He  is  liable  to  B  for  want  of  care 
in  using  the  horse. 


§67]  FOR  MUTUAL  BENEFIT  lOi 

c.  The  bailee  is  liable  to  third  persons  for  injuries  resulting 
to  them  from  his  use  of  the  article,  in  the  same  way  as  if  it  were 
his  own.  The  bailor  is  not  liable  unless  perhaps  for  some  in- 
herent vice  in  the  article,  of  which  he  did  not  warn  the  bailee. 
Third  persons  injuring  the  article  arc  liable  to  either  the  bailor 
or  the  bailee,  as  their  damage  may  appear. 

Examples :  4.  A  hires  R's  horse.  A  drives  so  negligently  that  he  injures 
C.    A  is  liable  to  C.    B  is  not  liable  to  C. 

5.  X  drives  into  the  horse  and  injures  it.  .X  is  liable  to  A  to  the  extent  that 
the  injury  renders  the  horse  less  valuable  to  A,  and  to  13  for  any  permanent 
injur)'  to  the  horse. 

d.  The  bailee  is  bound  to  compensate  the  bailor.  If  the  price 
is  not  fixed  by  agreement,  a  reasonable  price  is  understood.  If 
the  chattel  is  destroyed  without  fault  of  either  party  before  the 
term  of  the  bailment  is  completed,  the  contract  is  discharged, 
but  the  bailor  may  recover  the  reasonable  value  of  such  use  as 
the  bailee  has  had  up  to  that  time. 

e.  The  bailee  must  redeliver  the  chattel  at  the  termination  of 
the  bailment,  and  must  pay  any  damages  done  to  it  by  his  negli- 
gence. If  the  bailee  converts  the  chattel  and  the  bailor  recovers 
its  full  value,  the  absolute  title  vests  in  the  bailee  upon  such 
payment  to  the  bailor. 

Example  6.  A  hires  B's  wagon  for  two  days.  At  the  end  of  two  days  B 
demands  it  and  A  refuses  to  return  it.  (a)  B  may  replevin  it ;  that  is,  get  it  by 
legal  process,  (d)  B  may  sue  in  .tort  for  conversion  and  get  a  judgment  for 
the  full  value  of  the  wagon.  When  A  pays  this  judgment  (not  before),  the  title 
to  the  wagon  vests  in  A. 

67.  Bailor  engages  bailee  to  keep,  repair,  or  transport  an 
article.  In  these  bailments  there  is  always  a  contract  under 
which  the  bailee  is  to  perform  some  services  upon  the  chattel 
for  a  compensation. 

I.  Different  bailments  under  this  Jiead.  These  bailments  are 
of  various  kinds  and  for  various  purposes.  There  are  three  dis- 
tinct types :  {a)  where  the  bailee  for  compensation  is  to  take  care 
of  the  goods  for  the  bailor,  as  a  warehouseman  stores  and  cares 
for  the  goods  of  his  cu.stomcr,  or  an  innkeeper  those  of  his  guest ; 
(p)  where  the  bailee  for  compensation  is  to  do  some  work  upon 
the  article,  as  a  jeweler  repairs  a  watch  or  a  miller  grinds  grain  ; 


102  BAILMENT  [Cn.y 

(<•)  where  the  bailee  is  to  carry  or  transport  goods  for  the  bailor 
for  a  compensation,  as  railways  carry  freight  or  postal  authorities 
carry  letters. 

The  cases  of  innkeepers  and  common  carriers  present  peculiar 
features  and  will  be  treated  separately. 

2.  Liabilities  of  bailor.  In  addition  to  the  liabilities  of  bailors 
in  other  relations,  the  bailor  in  this  class  is  under  a  duty  to  com- 
pensate the  bailee.  That  the  bailee  receives  a  compensation  is 
the  distinctive  characteristic  of  these  bailments.  The  compensa- 
tion may  be  slight,  but  if  there  is  any  it  serves  to  take  the  case 
out  of  the  class  of  gratuitous  bailments.  Thus,  if  B  agrees  to 
take  and  care  for  C's  horse  upon  consideration  that  he  may  use 
it,  B  is  a  bailee  for  hire  and  is  not  a  mere  depositary ;  he  receives 
the  use  of  the  horse  as  compensation. 

Usually  the  compensation  is  fixed  by  the  contract  or  it  is 
understood  that  it  shall  be  the  reasonable  value  of  the  bailee's 
services.  When  the  bailee  has  fully  performed,  he  is  entitled  to  his 
compensation,  even  though,  before  the  article  is  returned  to  the 
bailor,  it  should  be  destroyed,  provided  the  destruction  is  due  to 
no  fault  of  the  bailee.  If  the  article  is  destroyed  without  his  fault 
after  he  has  partly  performed  but  before  his  contract  is  completed, 
he  is  entitled  to  compensation  for  labor  or  material  furnished  up  to 
the  time  of  the  destruction  of  the  article.  If  the  bailee  abandons 
the  work  without  justification,  many  courts  forbid  him  to  recover 
any  compensation,  but  some  permit  a  recovery  for  the  services 
less  the  damages  to  the  bailor  arising  from  the  breach.  So,  if 
the  bailee  docs  the  work  unskillfully,  but  it  is  of  some  value,  he 
may  recover  its  value  less  the  damages  to  the  bailor. 

Examples  .•  i.  B  runs  a  store.  He  permits  packages  to  be  left  there  to  be 
taken  by  a  local  expressman.  A  package  for  C  is  left  there  to  be  taken  by  the 
expressman,  and  when  called  for  cannot  be  found.  C  sues  B,  who  contends 
he  was  a  gratuitous  bailee  and  liable  only  for  gross  negligence.  The  judge 
tells  the  jury  that  B  is  not  a  bailee  for  hire  unless  he  is  to  receive  some  certain 
benefit,  —  that  an  uncertain,  cpntingent  benefit  in  drawing  custom  to  his  store 
is  not  enough.  On  appeal  the  court  held  this  was  error.  The  nature  and 
amount  of  compensation  are  immaterial.  The  law  will  not  inquire  whether  it 
is  adequate,  nor  in  such  a  case  whether  it  is  certain.  It  is  enough  that  B  de- 
rives some  compensation.  (But  note  that  in  this  case  C  is  under  no  obligation 
to  pay  B  anything.) 


§67]  FOR  MUTUAL  BENEFIT  103 

2.  C  agrees  to  work  as  bailee  on  B's  chattel.  After  beginning  the  work, 
but  before  completing  it,  he  stops  and  refuses  to  go  on.  Can  he  recover  any- 
thing ?  Many  courts  say  he  cannot,  because  he  has  committed  a  breach.  Some 
allow  him  to  recover  the  reasonable  value  of  his  services,  less  the  damages  to 
the  bailor  from  delay  in  the  completion  of  the  work. 

3.  Rights  and  liabilities  of  bailee.  These  are  often  regulated, 
at  least  in  part,  by  contract.  W'here  the  contract  is  silent,  the 
following  rules  apply. 

a.  The  bailee  is  bound  to  exercise  ordinaiy  care  and  diligence 
and  is  liable  for  ordinary  negligence,  but  the  standard  of  liability 
is  different  in  the  case  of  innkeepers  and  common  carriers.  If 
the  bailee  undertakes  to  perform  work  requiring  skill,  as  in  the 
case  of  a  watch  repairer,  he  is  bound  to  possess  and  exercise 
the  skill  ordinarily  possessed  by  those  engaged  in  the  occupation. 

b.  The  bailee  has  a  temporary,  special  property  in  the  chattel, 
and  may  protect  this  by  insurance  and  by  appropriate  action 
against  third  persons  who  interfere  with  his  possession. 

c.  The  bailee  has  a  lien  upon  the  chattel  for  his  reasonable 
charges  for  storage  or  for  services.  The  only  bailees  in  this 
class  who  were  excepted  at  common  law  were  agistors  who  pastured 
cattle,  and  livery-stable  keepers  who  cared  for  them,  but  statutes 
have  generally  extended  the  lien  in  favor  of  these  bailees,  as  well 
as  in  favor  of  garage  keepers.  At  common  law  the  lien  was 
merely  possessory  and  was  accompanied  by  no  power  to  sell,  but 
the  power  of  sale  to  enforce  the  lien  is  now  quite  generally  con- 
ferred by  statute, 

Warehoitsetnefi.  A  warehouseman  is  one  who  receives  and  stores  goods 
for  compensation.  The  warehouseman  usually  gives  a  "  warehouse  receipt  " 
for  goods  received  by  him.  These  receipts  may  be  transferred  by  indorsement 
so  as  to  give  the  indorsee  a  right,  upon  presenting  the  receipt,  to  claim  the 
goods.  Grain  stored  in  warehouses  is  transferred  by  merely  indorsing  and 
transferring  the  warehouse  receipts.  Usually  such  grain  is  mixed  with  like 
grain  of  other  bailors,  and  the  receipt  entitles  the  owner  to  the  specified  num- 
ber of  bushels  from  the  common  mass.  In  the  absence  of  contract  or  custom 
the  bailee  has  no  right  to  confu.se  the  bailor's  goods  with  those  of  others,  and 
if  he  docs  so  and  loss  ensues,  he  must  make  good  the  loss.  If  he  confuses  a 
bailor's  goods  with  his  own,  he  will  suffer  whatever  loss  or  inconvenience 
arises,  even  to  the  extent  of  losing  his  own  goods  altogether.  If  the  goods  are 
injured  or  lost,  it  is  incumbent  upon  the  warehouseman  to  account  for  the  in- 
jur)'.    If  he  pleads  a  fire  or  theft  or  the  like,  the  bailor  must  then  show  that 


104  BAILMENT  [Cii.v 

the  fire  or  theft  was  due  to  the  negligence  of  the  warehouseman.  The  rights 
and  duties  of  warehousemen  and  the  transfer  of  warehouse  receipts  are  now 
regulated  by  the  Uniform  Warehouse  Receipts  Act  in  forty-three  jurisdictions  : 
Alabama,  Arkansas,  California,  Colorado,  Connecticut,  Delaware,  Florida, 
Idaho,  Illinois,  Iowa,  Kansas,  Louisiana,  Maine,  Maryland,  Massachusetts, 
Michigan,  Minnesota,  Missouri,  Montana,  Nebraska,  Nevada,  New  Jersey,  New 
Mexico,  New  York,  North  Carolina,  North  Dakota,  Ohio,  Oregon,  Pennsyl- 
vania, Rhode  Island,  South  Dakota,  Tennessee,  Texas,  Utah,  Vermont,  Virginia, 
Washington,  West  Mrginia,  Wisconsin,  Wyoming,  Alaska,  District  of  Colum- 
bia, and  the  Philippine  Islands,  This  act  is  in  the  main  a  statement  of  the  gener- 
ally prevailing  common  law.  United  States  bonded  warehouses  are  regulated 
by  statute  (United  States  Compiled  Statutes  of  191 3,  §§  5638-5694).  They 
are  for  the  convenience  of  importers  or  others  required  to  pay  duties  or  excise 
taxes,  and  goods  are  kept  in  them  in  bond  until  such  taxes  are  paid. 

]\liarjingers.  Wharfingers  are  warehousemen  who  maintain  wharves  for 
the  purpose  of  receiving  goods  and  keeping  them  for  compensation. 

Safe-deposit  companies.  If  one  rents  a  safe-deposit  box  in  a  bank  or  in 
the  vaults  of  a  safe-deposit  company,  is  the  bank,  or  the  company,  a  bailee  of 
the  articles  stored  in  the  box?  Probably  not,  in  the  ordinary  sense  of  that 
term.  The  company  never  has  possession  of  the  contents  of  the  box.  The 
one  who  hires  the  box  puts  the  articles  in  it,  locks  it,  and  keeps  the  key. 
The  company,  for  added  security,  has  another  key,  without  the  use  of  which 
the  box  cannot  again  be  opened.  Neither  key  alone  will  open  the  box ;  both 
must  be  used.  The  situation  is  like  bailment,  but  does  not  fully  correspond  to  it. 
The  company  is  liable  for  breach  of  contract  in  permitting  any  unauthorized 
person  to  open  the  box,  and  is  bound  to  use  due  diligence  to  guard  the  box 
and  its  contents.  While  the  courts  sometimes  speak  of  these  transactions  as 
bailments,  there  is  a  material  difference  between  them  and  ordinary  bailments 
in  that  there  is  no  actual  delivery  of  the  goods  to  the  company. 

Banks.  When  money  is  deposited  in  a  bank,  the  relation  is  that  of  debtor 
and  creditor,  not  that  of  bailor  and  bailee.  One  may,  however,  make  a 
deposit  as  bailor.  Such  would  be  the  case  where  one  deposits  a  bag  of  gold, 
the  same  identical  money  to  be  returned  to  him. 


ITT.    Special  Cases  of  Bailment  for  Keeping  or 
Transportation 

68.  Innkeepers.  The  relation  of  an  innkeeper  to  his  guests, 
and  particularly  toward  the  goods  of  his  guests,  is  peculiar  and 
is  the  result  of  a  state  of  society  now  largely  outgrown, 

I.  Who  are  itinkccpcrs.  An  innkeeper  or  hotel  keeper  is  one 
who  holds  himself  out  to  the  public  as  ready  to  entertain  trav- 
elers or  transients  as  guests  for  a  compensation,  furnishing  food 


§6Sj  INNKEEPERS  105 

and  lodging  or  lodging  alone.  A  restaurant  is  not  an  inn,  be- 
cause it  furnishes  only  food.  A  lodging  house  is  not  an  inn, 
because  the  keeper  is  not  bound  to  entertain  any  who  apply,  and 
makes  a  special  contract  with  each.  An  innkeeper,  as  to  some 
of  his  permanent  guests,  may  be  rather  a  lodging-house  keeper 
or  a  boarding-house  keeper  than  strictly  an  innkeeper.  A  steamer 
providing  lodging  and  food  for  passengers  has  been  treated  as  to 
those  so  entertained  as  a  floating  inn,  but  there  is  strong  authority 
to  the  contrary.  A  sleeping  car,  on  the  other  hand,  is  held  not 
to  be  an  inn.  These  distinctions  are  very  nice  and  not  always 
satisfactory. 

2.  IV/io  arc  guests.  A  guest  at  an  inn  or  hotel  is  a  transient 
who  receives  accommodations  therein  under  a  contract,  express  or 
implied,  with  the  proprietor.  One  who  lives  regularly  or  perma- 
nently at  a  hotel  is  not  a  guest  in  the  legal  sense  of  the  term  ; 
but  one  may  engage  accommodations  for  a  definite  period,  longer 
or  shorter,  w-ithout  ceasing  to  be  a  guest,  provided  he  is  still  a 
wayfarer  or  transient  and  not  a  resident.  The  transient  may  be 
a  traveler  or  one  who  resides  in  the  place  where  the  inn  is 
located.  The  taking  of  lodgings  is  not  necessary  to  make  the 
patron  a  guest.  A  traveler  who  resorts  to  an  inn  for  food  or 
drink  may  be  a  guest.  He  may  even  become  a  guest  of  the  inn- 
keeper at  the  railway  station  and  there  put  his  baggage  in  charge 
of  the  hotel  porter. 

Examples :  \.  P/s  family  reside  in  X.  but  15  lives  in  Y  and  visits  X 
only  occasionally.  The  family  engage  permanent  accommodations  at  a  hotel. 
IJ  visits  them  there  and  remains  at  the  hotel  for  a  month.  B's  watch  and 
his  wife's  jewels  are  stolen.  B  is  a  guest  and  the  innkeeper  is  liable  to  him 
for  the  loss  of  the  watch.  His  wife  is  not  a  guest  and  cannot  recover  for 
her  jewelry. 

2.  B  goes  to  a  hotel  and  registers,  but  does  not  take  a  room.  He  goes 
to  the  dining  room,  leaving  his  hand  bag  in  the  custody  of  a  porter.  It  is 
stolen.  The  innkeeper  is  liable.  The  taking  of  a  room,  however,  is  a  quite 
decisive  test. 

3.  Rig/its  aud  liabilities  of  ati  itnikccpcr.  These  differ  in 
several  particulars  from  tho.sc  of  other  bailees. 

a.  An  innkeeper  is  bound  to  receive  all  fit  and  orderly  guests 
if  he  has  accommodations  for  them,  llis  refusal  to  do  so  may 
render  him  liable  to  an   action   for  damages,    or   to   a   criminal 


T06  BAILMKNT  [Cu.V 

prosecution,  or  both.  Ordinary  bailees  may  choose  with  whom 
they  will  deal,  but  an  innkeeper  is  following  a  juiblic  calling  and 
must  serve  all  members  of  the  public  alike.  The  innkeeper  must 
receive  the  baggage  of  the  traveler  also. 

/j.  At  common  law  an  innkeeper  is  absolutely  liable  for  the 
loss  of  his  guest's  goods  in  the  inn,  unless  such  loss  was  due  to 
an  act  of  God,  to  an  act  of  the  public  enemy,  or  to  the  fault  of 
the  guest.  He  is  thus  practically  an  insurer  of  the  safety  of  the 
goods,  —  and  especially  against  theft,  —  a  liability  which  does  not 
attach  to  bailees  generally.  This  rule  originated  in  early  times 
when  robbers  infested  the  routes  of  travel,  and  was  intended  to 
protect  the  guest  from  collusion  between  them  and  the  inn- 
keepers. Modern  statutes  have  to  some  extent  relieved  the  inn- 
keeper from  this  high  degree  of  liability  by  providing  that  if  he 
posts  notices  that  he  has  a  safe  in  which  valuables  may  be  de- 
posited, he  shall  not  be  liable  for  those  retained  by  the  guest. 
Whether  "valuables"  includes  reasonable  pocket  money  has  been 
differently  decided,  but  in  New  York  it  is  held  that  all  money 
is  included,  and  that  if  a  guest  retains  any  money  he  does  so  at 
his  own  risk.  On  the  other  hand,  in  New  York  it  is  held  that 
a  watch  is  not  an  ornament  and  that  the  innkeeper  is  an  insurer 
of  its  safety,  even  though  it  is  not  deposited  in  the  safe. 

While  the  common-law  rule  of  liability  stated  above  is  the  one  quite  gener- 
ally adopted,  it  has  not  gone  without  dispute.  Indeed,  three  different  rules 
have  been  applied:  (i)  the  strict  rule  given  above,  that  the  innkeeper  is  an 
insurer,  with  the  exceptions  noted ;  (2)  that  the  innkeeper  may  excuse  himself 
by  showing  inevitable  accident  or  irresistible  force,  though  not  amounting  to 
an  act  of  God  or  the  public  enemy,  as  fire  or  robbery ;  (3)  that  the  innkeeper 
may  excuse  himself  by  showing  that  he  was  free  from  negligence.  Many 
statutes  have  expressly  relieved  the  innkeeper  of  liability  for  loss  not  due  to 
his  negligence.    (For  the  meaning  of  "  act  of  God  "  see  sect.  6g,  p.  108,  />osf.) 

The  innkeeper  is  also  bound  to  use  due  care  to  protect  guests  from  assaults 
or  insults,  and  especially  those  proceeding  from  the  servants  of  the  inn. 

c.  The  innkeeper  has  a  lien  upon  the  baggage  of  his  guest 
for  the  amount  of  the  guest's  bill.  At  common  law  he  had  no 
power  to  sell  the  goods  in  order  to  enforce  the  lien,  but  such 
power  is  now  generally  conferred  by  statute. 

4.  Innkeeper  as  ordinary  bailee.  An  innkeeper  is  an  ordinary 
bailee  of  goods  brought  to  the  inn  by  a  guest  for  show  or  sale, 


§69]  COMMON  CARRIERS  OF  GOODS  107 

of  the  goods  of  boarders,  and  of  goods  held  by  him  under  a  lien. 
He  may  be  a  gratuitous  bailee  of  goods  left  by  one  not  a  guest, 
or  left  for  an  unreasonable  time  by  one  who  has  ceased  to  be 
a  guest. 

69.  Common  carriers  of  goods.  No  other  bailee  for  mutual 
benefit  undertakes  so  high  a  degree  of  liability  as  a  common 
carrier  of  goods,  although  by  special  contract  the  carrier  now 
usually  avoids  the  extreme  liability  fixed  by  the  common  law. 

1.  IV/io  are  conmwti  carriers.  A  common  carrier  is  one  who, 
in  the  exercise  of  a  public  calling,  undertakes  to  transport  for  a 
compensation  the  property  of  any  person  who  may  apply.  A 
private  carrier  is  one  who  so  transports  goods  under  special  con- 
tract, without  being  engaged  in  the  business  as  a  public  employ- 
ment. A  common  carrier  holds  himself  out  as  ready  to  serve  all 
persons  indifferently  to  the  extent  of  his  ability.  In  this  respect 
he  is  like  the  innkeeper.  Railways,  steamboats,  canal  boats, 
express  companies,  stages,  and  the  like,  so  far  as  they  carry 
goods,  are  common  carriers. 

2.  Liabilities.  Two  things  distinguish  the  liabilities  of  com- 
mon carriers  from  those  of  private  carriers  and  most  other 
bailees  :  first,  they  are  liable  for  wrongfully  refusing  to  receive 
and  transport  goods;  second,  they  are  insurers  of  goods  against 
all  loss  or  damage,  except  such  as  may  be  occasioned  by  the  act 
of  God,  or  of  the  public  enemy,  or  of  public  authority,  or  of  the 
shipper  himself,  or  which  may  be  due  to  the  inherent  nature  or 
infirmity  of  the  goods. 

I'irst.  The  duty  to  carry  for  all  indifferently  arises  from  the 
public  or  quasi-public  nature  of  'the  calling.  A  refusal  to  carry 
up  to  the  limit  of  his  facilities  may  render  a  common  carrier 
liable  in  damages,  or  he  may  be  compelled  by  the  courts  to  per- 
form the  duty  specifically.  Dangerous  goods,  or  goods  other  than 
those  which  the  carrier  professes  to  carry,  may  be  lawfully  re- 
fused. Carriers,  like  railways,  which  enjoy  special  franchises  (as 
rights  of  way  or  the  power  to  condemn  lands  for  a  right  of  way) 
may  be  compelled  to  supply  reasonably  sufTicient  facilities  and 
to  carry  the  goods  which  the  community  requires  to  have  carried, 
but  carriers  not  enjoying  such  special  privileges  cannot  be  com- 
pelled to  supply  greater  facilities  than  tluy  choose.    The  duty  to 


lOS  I'.AILMKNT  [Ch.  V 

carry  for  all  indifferently  implies  the  duty  not  to  discriminate 
between  customers  by  giving  any  preference  to  the  goods  of  one 
over  those  of  another,  or  by  charging  one  shipper  more  than  a 
reasonable  rate  while  carrying  for  another  at  a  reasonable  rate. 
Aside  from  statute  there  is  diversity  of  opinion  as  to  whether  a 
carrier  may  carry  for  one  at  less  than  a  reasonable  rate,  provided 
he  carried  for  others  at  a  reasonable  rate.  There  exist  in  most 
states  statutes  governing  the  rates  to  be  charged  by  common 
carriers  for  transportation  beginning  and  ending  within  a  state, 
and  the  Federal  Congress  has  enacted  a  similar  statute,  known 
as  the  Interstate  Commerce  Act,  providing  a  method  for  regu- 
lating the  rates  to  be  charged  for  transportation  from  one  state 
to  another. 

Second.  The  liability  for  loss  or  damage  is  very  great.  In  the 
absence  of  contract  to  the  contrary,  or  of  statutory  modification, 
a  common  carrier  is  liable  absolutely  for  all  loss  or  damage  to  the 
goods  in  his  hands  as  common  carrier,  except  as  follows : 

a.  The  carrier  is  not  liable  for  loss  occasioned  by  an  act  of 
God ;  that  is,  by  some  force  of  nature  beyond  the  control  of  man 
and  unconnected  with  any  culpable  human  agency.  Lightning, 
extraordinary  floods,  cyclones,  and  the  like  are  regarded  as  acts 
of  God.  Fire,  unless  occasioned  by  lightning,  is  not.  Accident  is 
not,  unless  it  be  what  is  termed  inevitable  accident.  Even  if  the 
loss  is  due  to  an  act  of  God,  the  carrier  may  be  liable  if  the  loss 
is  related  approximately  to  some  negligence  of  his. 

Examples:  i.  The  carrier  negligently  delays  goods  at  X,  where  there 
is  known  to  be  danger  of  a  flood.  Even  if  the  goods  are  destroyed  by  an 
extraordinary  flood,  the  negligence  in  delaying  them  there  may  render  the 
carrier  liable. 

2.  A  steam  boiler  explodes  without  any  known  cause  and  injures  a 
shipper's  goods.     The  carrier  is  liable. 

3.  Lightning  sets  fire  to  a  freight  car  and  destroys  its  contents.  The  carrier 
is  not  liable. 

4.  A  fire  breaks  out  from  causes  unknown  and  destroys  freight.  The 
carrier  is  liable. 

b.  The  carrier  is  not  liable  for  loss  or  damage  occasioned  by 
the  public  enemy ;  that  is,  by  an  organized  military  force  making 
war  upon  the  country  of  the  carrier  or  by  pirates  on  the  high 
seas.    Mobs,   rioters,   strikers,  and  the  like  are  not  regarded  as 


§69]  COMMON  CARRIERS  OF  GOODS  109 

public  enemies  within  this  exception.  The  carrier  is  hable  for 
loss  by  theft.  If  he  negligently  exposes  the  goods  to  the  risk  of 
destruction  by  the  public  enemy,  when  he  could  take  a  safer 
route,  he  will  be  liable  for  the  loss. 

c.  The  carrier  is  not  liable  for  losses  due  to  the  fault  of  the 
shipper. 

Examples :  i .  The  shipper  improperly  packs  breakable  goods,  as  china, 
and  they  are  injured  in  transit.    The  carrier  is  not  liable. 

2.  The  shipper  conceals  money  in  a  box  of  ordinary  freight  and  it  is  lost. 
The  carrier  is  not  liable  for  the  loss  of  the  money,  because  he  is  entitled  to 
be  advised  of  the  value  of  the  goods  in  order  that  he  may  take  necessary 
precautions. 

d.  The  carrier  is  not  liable  for  any  loss  or  damage  due  to  the 
intervention  of  some  lawful  public  authority,  as  where  goods  are 
taken  from  him  by  health  officers  or  by  seizure  under  legal  process. 

e.  The  carrier  is  not  liable  for  loss  or  damage  due  to  the 
inherent  nature  or  infirmity  of  the  goods. 

Example.  The  carrier  is  not  liable  for  the  decay  of  fruit  unless  he  has 
negligently  delayed  it  in  transit.  He  is  not  liable  for  the  death  of  stock  due 
to  disease  or  fright,  unless  such  death  can  be  proximately  traced  to  some 
negligence  of  his. 

In  any  case  the  carrier  is  liable  for  his  own  negligence  to  the 
same  extent  as  any  bailee  for  hire.  He  is  liable  for  deviations  or 
delays  resulting  in  loss  if  due  to  his  negligence. 

•3.  Modifications  of  liability  by  contract  or  statute.  A  com- 
mon carrier  may,  unless  forbidden  by  statute  to  do  so,  contract 
with  the  shipper  to  limit  his  liability  to  that  of  an  ordinary  bailee  ; 
that  is,  he  may  contract  against  liability  as  an  insurer.  The  rule 
that  he  should  insure  the  safety  of  the  goods  was  intended  to 
protect  the  shipper  against  collusion  between  the  carrier  and 
highwaymen  or  other  robbers.  The  reason  for  the  rule  has  prac- 
tically disappeared,  and  therefore  the  courts  uphold  contracts 
which  abrogate  the  rule  so  far  as  they  are  reasonable  .  not 
contrary  to  public  policy. 

Carriers  have  also  sought  to  contract  against  their  own  negli- 
gence or  that  of  their  employees  ;  that  is,  against  the  liability  fixed 
for  an  ordinary  bailee.  This  most  courts  have  refused  to  permit 
them  to  do,  upon  the  ground  that  it  is  contrary  to  pulilic  jx)licy. 


no  BAILMENT  [Cn.  V 

• 

England  and  New  York  permit  it,  although  even  there  the  shij^pcr 
is  entitled,  upon  the  payment  of  a  higher  rate,  to  have  his  goods 
carried  without  such  a  limited-liability  contract. 

In  some  jurisdictions  statutes  modify  the  common-law  liability 
of  carriers  in  some  particulars  ;  for  example,  by  exempting  the 
carrier  from  loss  or  damage  by  fire  not  due  to  the  negligence 
of  the  carrier. 

By  sect.  20  of  the  Interstate  Commerce  Act  a  carrier  engaged 
in  interstate  commerce  is  liable  to  the  shipper  for  the  full  dam- 
age done  to  the  goods,  notwithstanding  any  limitation  of  liability  or 
limitation  of  the  amount  of  recovery  or  representation  or  agreement 
as  to  value  in  the  receipt  or  bill  of  lading. 

Contracts  sometimes  limit  the  amount  of  liability  to  a  sum  fixed  by  the 
shipper  as  the  value  of  his  goods.  These  are  generally  upheld  on  the  ground 
that  if  the  value  is  greater  than  that  fixed,  the  carrier  is  entitled  to  greater 
compensation  for  the  added  risk. 

Contracts  also  often  require  claims  for  loss  or  damage  to  be  presented  within 
a  stated  time ;  and  if  the  time  allowed  is  reasonable,  these  are  also  upheld. 

The  consideration  of  these  contracts  is  usually  that  the  carrier  will  transport 
the  goods  at  a  lower  rate  than  that  charged  where  his  liability  is  that  fixed  by 
the  common  law.  (For  the  contract  usually  made  see  the  uniform  bill  of  lading 
conditions,  post.) 

A  mere  notice  not  brought  to  the  attention  of  the  shipper  cannot  operate 
to  limit  the  carrier's  liability.  But  a  notice  in  a  bill  of  lading,  express  receipt, 
and  the  like  is  presumed  to  be  assented  to  by  the  shipper  who  receives  it,  if  it 
is  delivered  to  him  before  the  goods  are  beyond  recall.  This  rule  does  not 
apply  to  a  local  baggage  carrier  who  gives  a  receipt  for  baggage,  because  cus- 
tom has  not  made  such  receipts  evidence  of  a  contract.  In  the  case  of  the 
ordinary  railway  ticket  it  must  be  shown  that  the  person  receiving  the  token 
or  ticket  actually  saw  or  knew  of  the  notice  when  he  took  the  receipt  or  pur- 
chased the  ticket,  or  had  notice  that  there  was  so?ne  limitation  in  the  ticket  or 
accepted  the  ticket  with  notice  that  it  was  a  special  contract. 

4.  Wheti  liability  ends.  Liability  as  carrier  ends  when  the 
goods  are  delivered  to  the  consignee,  or  when  after  notice  the 
consignee  leaves  the  goods  an  unreasonable  time  in  the  hands  of 
the  carrier.  In  the  latter  case  the  carrier  ceases  to  be  liable  as 
carrier  and  becomes  liable  as  warehouseman.  In  many  states  a 
railway  carrier  becomes  merely  a  warehouseman,  without  notice  to 
the  consignee,  when  the  goods  arrive  at  their  destination  and  are 
unloaded  into  the  railway  freight  house  ;  in  other  states  the  change 


§69]  COMMON  CARRIERS  OF  GOODS  m 

of  position  occurs  after  the  goods  have  been  in  the  freight  house 
a  reasonable  time  ;  and  in  still  other  states,  including  New  York, 
it  is  further  required  that  notice  of  arrival  shall  have  been  given 
to  the  consignee  or  a  reasonable  effort  made  to  give  such  notice. 

Liability  also  ends  when  a  carrier,  having  received  goods  to 
be  transported  over  its  own  and  connecting  lines,  has  delivered 
the  goods  to  a  connecting  carrier,  unless  the  first  carrier  has 
contracted  to  transport  the  goods  to  their  final  destination. 

By  sect.  20  of  the  Interstate  Commerce  Act,i  where  several  car- 
riers are  engaged  in  transporting  goods  from  one  state  to  another 
or  from  the  United  States  to  a  foreign  country',  the  initial  carrier 
is  liable  for  all  loss  or  damage  on  through  shipments,  even  though 
such  loss  or  damage  may  have  been  caused  by  acts  of  the  second 
or  later  carriers.  The  initial  carrier  may,  of  course,  recover  from 
the  carrier  actually  responsible  for  the  loss  or  damage  any  sums 
which  the  initial  carrier  has  been  obliged  to  pay  under  this  statute. 

By  merely  accepting  goods  billed  to  a  point  beyond  its  own  line,  a  carrier 
does  not,  in  the  absence  of  statute,  contract  to  be  liable  after  the  goods  leave 
its  hands ;  there  must  be  something  in  the  contract  to  that  effect.  This  is  the 
general  American  doctrine,  but  in  England  and  a  few  of  our  states  it  is  held 
that  a  railway  accepting  goods  billed  beyond  its  line  impliedly  undertakes  to 
deliver  them  at  their  final  destination  and  is  therefore  liable  for  loss  occurring 
upon  a  connecting  line.  If  the  first  carrier  takes  prepayment  for  the  whole 
transit,  or  in  the  bill  of  lading  agrees  "  to  forward,"  or  uses  like  expressions 
indicative  of  an  agreement  to  deliver  at  the  final  destination,  a  contract  for  the 
whole  transportation  may  be  implied.  If  the  first  carrier  is  not  made  liable  by 
its  contract,  the  shipper  must  recover  against  the  carrier  that  causes  the  loss 
or  damage ;  but  goods  found  damaged  in  the  hands  of  a  railway  company  are 
presumed  to  have  been  damaged  by  that  company. 

5.  Delivery.  The  carrier  must  deliver  the  goods  to  the  con- 
signee or  a  connecting  carrier  or  pay  damages  for  nondelivery, 
unless  {a)  they  are  claimed  by  one  whose  title  is  superior,  as  by 
a  true  owner  whose  goods  have  been  converted,  or  (/;)  the  con- 
signor has  exercised  the  right  of  stoppage  in  transitu  (see  p.  82 
ante),  or  (r)  they  have  been  lost  from  a  cause  for  which  the  car- 
rier is  not  liable.  If  the  carrier  delivers  to  the  wrong  person,  he 
is  liable  for  conversion.  The  carrier  must  use  due  diligence  to 
notify  the  consignee  of  the  arrival  of  the  goods. 

'  See  sect.  26  ante. 


Ilj  BAILMENT  [Ch.  V 

o.  lulls  of  lading;  etc.  A  bill  of  lading  is  the  written  receipt, 
b\-  a  carrier,  for  goods  delivered  to  the  carrier  for  transportation, 
ami  an  agreement  to  transport  and  deliver  them  to  a  person  named 
therein  or  to  his  order.  It  is  signed  by  an  agent  of  the  owner 
of  the  vessel,  railroad,  or  other  transportation  agency. 

The  rules  regarding  the  issuance  and  transfer  of  bills  of  lading, 
and  the  rights  and  duties  of  carriers  and  shippers  thereunder,  are 
now  set  forth  in  twenty-three  jurisdictions  ^  in  the  Uniform  Bills  of 
Lading  Act.  By  Act  of  Aug.  29,  19 16,  Congress  passed  a  Bills  of 
Lading  Act  practically  identical  with  the  Uniform  ]^ills  of  Lading 
Act.  The  federal  statute,  of  course,  governs  only  bills  of  lading 
used  in  interstate  commerce  and  commerce  between  the  United 
States  and  a  foreign  nation  or  the  dependencies  of  the  United  States. 

A  charter  party  is  a  contract  of  affreightment  in  writing,  by 
which  the  owner  of  a  vessel  lets  the  whole  or  a  part  of  her  to  a 
person  for  the  transportation  of  goods  for  a  particular  voyage,  in 
consideration  of  the  payment  of  freight  charges.  A  charter  party 
may  leave  the  possession  and  control  of  the  vessel  with  the  owner, 
or  may  transfer  the  possession  and  control  to  the  freighter. 

With  the  growth  of  commerce  and  the  increase  of  carriers  it 
has  been  found  advantageous  to  have  a  uniform  bill  of  lading. 
The  Interstate  Commerce  Commission  has  approved  a  standard 
form  of  a  bill  of  lading  which  is  now  in  general  use.^  Shippers, 
when  once  familiar  with  it,  need  not  scrutinize  each  one  in  order 
to  ascertain  whether  it  contains  some  new  term.  Like  the  stand- 
ard fire-insurance  policy,  it  brings  uniformity  into  an  everyday 
transaction  and  contract. 

A  shipping  order  is  also  used  as  a  part  of  the  uniform  bill-of- 
lading  forms.  This  is  an  order  signed  by  the  shipper  and  ad- 
dressed to  the  carrier,  directing  him  to  receive  and  carry  the 
goods.    It  contains  the  same  conditions  as  the  bill  of  lading. 

There  are  also  in  use  a  uniform  export  bill  of  lading  and  a 
uniform  live-stock  bill  of  lading. 

1  ThesejurisdictionsareCalifornia,  Connecticut,  Idaho,  Illinois,  Iowa,  Louisiana, 
Maine,  Maryland,  Massachusetts,  Michigan,  Minnesota,  Missouri,  New  Hamp- 
shire, New  York,  North  Carolina,  Ohio,  Pennsylvania,  Rhode  Island,  Vermont, 
Washington,  Wisconsin,  Alaska,  and  the  Philippine  Islands. 

2  The  Interstate  Commerce  Commission  now  has  under  consideration  the 
approval  of  a  revised  standard  form  of  bill  of  lading. 


Daflorn  eiU  •(  Latflag— SU<i4tr4  Farm  ol  SWIshI  Bit!  tl  Lidlag  approved  ty  th«  IntirsUte  Cenioerci  Connhsioit  br  Crdcr  No.  787  of  lune  ZT.  190ft. 

The  Delaware,  Lackawanna  &  Western  Railroad  Company 


STRAIGHT  BILL  OF  LADING-ORIGINAL-NOT  NEGOTIABLE 


Shipper's  Ho._2^Je_ 
Agent's  No.      ^  /  ^' 


at 

frora_ 


RBCBIVEO.  subject  to  the  c]4&si&caUOQi  aod  UnBt  io  efiect  oo  the  date  ol 


//t^. 


I^ 


ol  ibis  Ongiool  Uill  of   L.«d)Dg, 


.I'JIC: 


/^TK-^-g^ 


ihe  properly  described  below,  in  apparent  good  order,  except  as  noted 

\  of  paclLages  unltnowo),  marked,  coTuigned  and  destined  as  indicated  below,  which  satd  Company 
agrees  to  carry  to  its  usual  place  of  delivery  at  said  destination,  if  on  its  road,  otherwise  to  deliver  to  another  earner  on  the  route  to 
said  destination.  It  is  mutually  acreed,  as  to  each  earner  of  all  or  any  of  laid  property  over  all  or  any  ponion  of  said  route  to 
destination,  and  as  to*ach  pany  at  any  time  interested  in  all  or  any  of  said  propeny,  that  every  service  to  be  performed  hereunder 
shall  be  subject  ro  all  the  conditions,  whether  printed  or  wrirten,  herein  contained  (including  condinons  on  back  hereof),  and  which 
are  agreed  to  by  the  shipper,  and  accepted  for  himself  and  his  assigns. 

Jm  A.  c  £<^ 


The  Rate  of  Freight  from. 


ptcucts 

DESCRIPTION  OF  ARTICLES  AND  SPECIAL  MARKS 

WEI6HT 

CLASS 

COLUMN 

If  charges  are  to  bo 
prepaid,  write  or  stamp 
here.  "To  be  Prepaid." 

-^ 

l^jc^j^     \.'A^L'-C< 

iS'o 

to  apply  in  prepayment 

of  the  charges  on  the 
property      described 

hereon. 

Per 

MirilMMOUBlprapwdJ 

Charges    advanced . 

% 

l^s  H-.  ^~ 


cr\^.<'^ 


:/f^^  /v^^^:^ 


rXkto  B  U  gT  U^IM  •■ 


il  br  Uha  aKiepar  a^  ^TMt  aT  Um  caITUc  litwrfcwi  > 


The  words  "  not  negotiable  "  arc  printed  on  the  face  of  each  uniform  bill  of  lading 
for  the  protection  of  carriers  under  certain  state  laws.  They  are  sometimes 
omitted  where  they  interfere  with  the  obtaining  by  the  shipper  of  advances 
upon  the  bill  of  lading. 


"3 


114 


BAILMENT 


[Ch.  V 


CoNPrnoNS 


Sec.  1.  The  carrier  or  party  in  pos- 
session of  any  of  the  property  herein 
described  shall  be  liable  for  any  loss 
thereof  or  damage  thereto,  except  as 
hereinafter  provided. 

No  carrier  or  party  in  possession  of 
any  of  the  property  herein  described 
shall  be  liable  for  any  loss  thereof  or 
damage  thereto  or  delay  caused  by  the 
act  of  God,  the  public  enemy,  quaran- 
tine, the  authority  of  law,  or  the  act  or 
default  of  the  shipper  or  owner,  or  for 
differences  in  the  weights  of  grain,  seed, 
or  other  commodities  caused  by  natural 
shrinkage  or  discrepancies  in  elevator 
weights.  P^or  loss,  damage,  or  delay 
caused  by  fire  occurring  after  forty- 
eight  hours  (exclusive  of  legal  holidays) 
after  notice  of  the  arrival  of  the  prop- 
erty at  destination  or  at  port  of  export 
(if  intended  for  export)  has  been  duly 
sent  or  given,  the  carrier's  liability  shall 
be  that  of  warehouseman  only.  Except 
in  case  of  negligence  of  the  carrier  or 
party  in  possession  (and  the  burden  to 
prove  freedom  from  such  negligence 
shall  be  on  the  carrier  or  party  in  pos- 
session), the  carrier  or  party  in  posses- 
sion shall  not  be  liable  for  loss,  damage, 
or  delay  occurring  while  the  property 
is  stopped  and  held  in  transit  upon  re- 
quest of  the  shipper,  owner,  or  party 
entitled  to  make  such  request ;  or  re- 
sulting from  a  defect  or  vice  in  the 
property  or  from  riots  or  strikes.  When 
in  accordance  with  general  custom,  on 
account  of  the  nature  of  the  property, 
or  when  at  the  request  of  the  shipper 
the  property  is  transported  in  open  cars, 
the  carrier  or  party  in  possession  (ex- 
cept in  case  of  loss  or  damage  by  fire, 
in  which  case  the  liability  shall  be  the 
same  as  though  the  property  had  been 
carried  in  closed  cars)  shall  be  liable 


only  for  negligence,  and  the  burden  to 
prove  freedom  from  such  negligence 
shall  be  on  the  carrier  or  party  in  pos- 
session. 

Sec.  2.  In  issuing  this  bill  of  lading 
this  company  agrees  to  transport  only 
over  its  own  line,  and  except  as  other- 
wise provided  by  law  acts  only  as  agent 
with  respect  to  the  portion  of  the  route 
beyond  its  own  line. 

No  carrier  shall  be  liable  for  loss, 
damage,  or  injury  not  occurring  on  its 
own  road  or  its  portion  of  the  through 
route,  nor  after  said  property  has  been 
delivered  to  the  next  carrier,  except  as 
such  liability  is  or  may  be  imposed  by 
law,  but  nothing  contained  in  this  bill 
of  lading  shall  be  deemed  to  exempt 
the  initial  carrier  from  any  such  liability 
so  imposed. 

Sec.  3.  No  carrier  is  bound  to  trans- 
port said  property  by  any  particular  train 
or  vessel  or  in  time  for  any  particular 
market  or  otherwise  than  with  reason- 
able dispatch,  unless  by  specific  agree- 
ment indorsed  hereon.  Every  carrier 
shall  have  the  right  in  case  of  physical 
necessity  to  forward  said  property  by 
any  railroad  or  route  between  the  point 
of  shipment  and  the  point  of  destina- 
tion ;  but  if  such  diversion  shall  be  from 
a  rail  to  a  water  route  the  liability  of  the 
carrier  shall  be  the  same  as  though  the 
entire  carriage  were  by  rail. 

The  amount  of  any  loss  or  damage 
for  which  any  carrier  is  liable  shall  be 
computed  on  the  basis  of  the  value  of 
the  property  (being  the  bona  fide  in- 
voice price,  if  any,  to  the  consignee, 
including  the  freight  charges,  if  pre- 
paid) at  the  place  and  time  of  shipment 
under  this  bill  of  lading,  unless  a  lower 
value  has  been  represented  in  writing 
by  the  shipper  or  has  been  agreed  upon 


§69] 


COMMON  CARRIERS  OF  GOODS 


115 


or  is  determined  by  the  classification  or 
tariffs  upon  which  the  rate  is  based,  in 
any  of  which  events  such  lower  value 
shall  be  the  maximum  amount  to  govern 
such  computation,  whether  or  not  such 
loss  or  damage  occurs  from  negligence. 

Claims  for  loss,  damage,  or  delay  must 
be  made  in  writing  to  the  carrier  at  the 
point  of  delivery  or  at  the  point  of  origin 
within  four  months  after  delivery  of  the 
property,  or  in  case  of  failure  to  make 
delivery,  then  within  four  months  after  a 
reasonable  time  for  delivery  has  elapsed. 
Unless  claims  are  so  made  the  carrier 
shall  not  be  liable. 

Any  carrier  or  party  liable  on  account 
of  loss  of  or  damage  to  any  of  said 
property  shall  have  the  full  benefit  of 
any  insurance  that  may  have  been 
effected  upon  or  on  account  of  said 
property,  so  far  as  this  shall  not  avoid 
the  policies  or  contracts  of  insurance. 

'  Sec.  4.  All  property  shall  be  subject 
to  necessary  cooperage  and  baling  at 
owner's  cost.  Each  carrier  over  whose 
route  cotton  is  to  be  transported  here- 
under shall  have  the  privilege,  at  its 
own  cost  and  risk,  of  compressing  the 
same  for  greater  convenience  in  hand- 
ling or  forwarding,  and  shall  not  be  held 
responsible  for  deviation  or  unavoidable 
delays  in  procuring  such  compression. 
Grain  in  bulk  consigned  to  a  point  where 
there  is  a  railroad  public,  or  licensed 
elevator,  may  (unless  otherwise  ex- 
pressly noted  herein,  and  then  if  it  is 
not  promptly  unloaded)  be  there  de- 
livered and  placed  with  other  grain  of 
the  same  kind  and  grade  without  re- 
spect to  ownership,  and  if  so  delivered 
shall  be  subject  to  a  lien  for  elevator 
charges  in  addition  to  all  other  charges 
hereunder. 

Sec.  5.  Property  not  removed  by  the 
party  entitled  to  receive  it  within  forty- 
eight  hours  (exclusive  of  legal  holidays) 


after  notice  of  its  arrival  has  been  duly 
sent  or  given  may  be  kept  in  car,  depot, 
or  place  of  delivery  of  the  carrier, 
or  warehouse,  subject  to  a  reasonable 
charge  for  storage  and  to  carrier's  re- 
sponsibility as  warehouseman  only,  or 
may  be,  at  the  option  of  the  carrier, 
removed  to  and  stored  in  a  public  or 
licensed  warehouse  at  the  cost  of  the 
owner  and  there  held  at  the  owner's 
risk  and  without  liability  on  the  part 
of  the  carrier,  and  subject  to  a  lien 
for  all  freight  and  other  lawful  charges, 
including  a  reasonable  charge  for 
storage. 

The  carrier  may  make  a  reasonable 
charge  for  the  detention  of  any  vessel 
or  car,  or  for  the  use  of  tracks  after  the 
car  has  been  held  forty-eight  hours  (ex- 
clusive of  legal  holidays),  for  loading  or 
unloading,  and  may  add  such  charge  to 
all  other  charges  hereunder  and  hold 
such  property  subject  to  a  lien  therefor. 
Nothing  in  this  section  shall  be  con- 
strued as  lessening  the  time  allowed 
by  law  or  as  setting  aside  any  local 
rule  affecting  car  service  or  storage. 

Property  destined  to  or  taken  from 
a  station,  wharf,  or  landing  at  which 
there  is  no  regularly  appointed  agent 
shall  be  entirely  at  risk  of  owner  after 
unloaded  from  cars  or  vessels  or  until 
loaded  into  cars  or  vessels,  and  when 
received  from  or  delivered  on  private 
or  other  sidings,  wharves,  or  landings 
shall  be  at  owner's  risk  until  the  cars 
are  attached  to  and  after  they  are  de- 
tached from  trains. 

Sec.  6.  No  carrier  will  carry  or  be 
liable  in  any  way  for  any  documents, 
specie,  or  for  any  articles  of  extraordi- 
nary value  not  specifically  rated  in  the 
published  classification  or  tariffs,  un- 
less a  special  agreement  to  do  so  and 
a  stipulated  value  of  the  articles  are 
indorsed  hereon. 


ii6 


HAILMENT 


[Cn.  V 


Sec.  7.  Every  party,  whether  prin- 
cipal or  agent,  shipping  explosive  or 
dangerous  goods,  without  previous  full 
written  disclosure  to  the  carrier  of  their 
nature,  shall  be  liable  for  all  loss  or 
damage  caused  thereby,  and  such  goods 
may  be  warehoused  at  owner's  risk  and 
expense  or  destroyed  without  compen- 
sation. 

Sec.  8.  The  owner  or  consignee  shall 
pay  the  freight,  and  all  other  lawful 
charges  accruing  on  said  property,  and, 
if  required,  shall  pay  the  same  before 
delivery.  If  upon  inspection  it  is  ascer- 
tained that  the  articles  shipped  are  not 
those  described  in  this  bill  of  lading, 
the  freight  charges  must  be  paid  upon 
the  articles  actually  shipped. 

Sec.  9.  Except  in  case  of  diversion 
from  rail  to  water  route,  which  is  pro- 
vided for  in  section  3  hereof,  if  all  or 
any  part  of  said  property  is  carried  by 
water  over  any  part  of  said  route,  such 
water  carriage  shall  be  performed  sub- 
ject to  the  liabilities,  limitations,  and 
exemptions  provided  by  statute  and  to 
the  conditions  contained  in  this  bill  of 
lading  not  inconsistent  with  such  stat- 
utes or  this  section,  and  subject  also  to 
the  condition  that  no  carrier  or  party  in 
possession  shall  be  liable  for  any  loss 
or  damage  resulting  from  the  perils  of 
the  lakes,  sea  or  other  waters  ;  or  from 
explosion,  bursting  of  boilers,  breakage 
of  shafts  or  any  latent  defect  in  hull, 


machinery,  or  appurtenances;  or  from 
collision,  stranding,  .or  other  accidents 
ol  n.i\ij;alion,  or  from  prolongation  of 
the  voyage.  .Vnd  any  vessel  carrying 
any  or  all  of  the  property  herein  de- 
scribed shall  have  the  liberty  to  call 
at  intermediate  ports,  to  tow  and  be 
towed  and  assist  vessels  in  distress,  and 
to  deviate  for  the  purpose  of  saving  life 
or  property. 

The  term  "water  carriage"  in  this 
section  shall  not  be  construed  as 
including  lighterage  across  rivers  or 
in  lake  or  other  harbors,  and  the 
liability  for  such  lighterage  shall  be 
governed  by  the  other  sections  of  this 
instrument. 

If  the  property  is  being  carried  under 
a  tariff  which  provides  that  any  carrier 
or  carriers  party  thereto  shall  be  liable 
for  loss  from  perils  of  the  sea,  then  as 
to  such  carrier  or  carriers  the  provi- 
sions of  this  section  shall  be  modified 
in  accordance  with  the  provisions  of 
the  tariff,  which  shall  be  treated  as  in- 
corporated into  the  conditions  of  this 
bill  of  lading. 

Sec.  10.  Any  alteration,  addition  or 
erasure  in  this  bill  of  lading  which  shall 
be  made  without  an  indorsement  thereof 
hereon,  signed  by  the  agent  of  the  car- 
rier issuing  this  bill  of  lading,  shall  be 
without  effect,  and  this  bill  of  lading 
shall  be  enforceable  according  to  its 
original  tenor. 


IV.    C.ASE.S    NOT    STRICTLY    OF    BAILMENT 

70.  Public  carriers  of  passengers  and  baggage.  Public  carriers 
of  passengers  are  those  who  in  the  exercise  of  a  jiubhc  caUing 
hold  themselves  out  as  ready  to  carry  all  passengers  who  apply. 
They  are  not,  of  course,  bailees  of  the  pensons  whom  they  carry,  al- 
though they  are  bailees  of  a  passenger's  baggage  delivered  into  their 
custody.  Proprietors  of  railways,  street  railways,  stagecoaches, 
steamers,  ferries,  omnibuses,  and  the  like  are  public  carriers. 


§70]  CARRIERS  OF  PASSENGERS  117 

1.  Passeiigers.  Passengers  are  those  persons  carried  by  a  pub- 
lic carrier  with  his  consent,  except  persons  in  his  service.  Persons 
carried  gratuitously,  as  well  as  persons  who  pay  their  fare,  are 
included.  It  is  the  duty  of  a  public  carrier,  up  to  the  limit  of 
reasonable  accommodations,  to  cdxvj  all  who  are  orderly  and 
who  pay  the  reasonable  charge. 

2.  Liability  of  public  carrier  of  passengers.  A  public  carrier 
does  not  insure  the  safety  of  passengers  as  he  does  the  safety  of 
goods,  but  he  is  bound  to  use  the  utmost  skill,  diligence,  and 
caution,  so  far  as  human  foresight  may  go,  and  is  liable  for  slight 
negligence  in  this  regard.  He  is  liable  also  for  any  willful  injury 
inflicted  by  one  of  his  servants,  and  is  bound  to  use  reasonable 
care  to  protect  the  passenger  from  violence  at  the  hands  of  other 
passengers.  He  may  eject  a  passenger  for  refusal  to  pay  fare  or 
for  disorderly  conduct,  using  only  as  much  force  as  is  necessary 
for  that  purpose. 

Whether  a  carrier  may  limit  his  liability  to  a  passenger  by  con- 
tract, and  especially  the  liability  for  the  negligence  of  servants, 
is  a  disputed  question.  He  may  in  England  and  in  New  York 
and  some  other  states,  but  the  United  States  Supreme  Court  and 
the  courts  of  most  states  regard  such  contracts  as  against  public 
policy,  although  the  United  States  Supreme  Court  permits  a 
carrier  to  limit  its  liability  to  a  passenger  carried  gratuitously. 

3.  Baggage.  A  carrier  is  bound  to  transport  a  reasonable 
amount  of  baggage  for  each  passenger.  Baggage  includes  such 
articles  of  necessity  or  convenience  as  a  passenger  may  carry  for 
his  personal  use,  but  not  articles  carried  as  merchandise.  For  all 
baggage  that  is  delivered  into  the  custody  of  the  carrier  he  is 
liable  as  insurer,  unless  the  liability  is  limited  by  lawful  contract. 
In  this  respect  the  liability  is  the  same  as  that  of  the  carrier  of 
goods.  There  are  therefore  usually  but  three  questions  that  arise 
in  the  case  of  the  loss  of  baggage:  (i)  Were  the  articles  lost 
really  the  baggage  of  the  passenger }  (2)  Was  the  baggage  actu- 
ally delivered  into  the  custody  of  the  carrier  or  did  the  passenger 
retain  custody  of  it  .-•  (3)  Was  there  any  lawful  contract  limiting 
the  liability  of  the  carrier.' 

Examples :  \.  A  traveler  poinp;  to  the  woods  for  recreation  carried  in 
his  trunk  guns  and  fishing  tackle  and  tennis  rackets.    The  trunk  was  lost  bv 


uS  BAILMENT  [Cn.V 

the  carrier.    I'nder  the  circumstances  these  articles  were  liekl  to  be  properly 
baggage. 

2.  A  commercial  traveler  carried  in  a  trunk  samples  of  the  goods  he  was 
selling.    These  were  held  not  to  be  baggage. 

3.  A  traveler  carried  in  his  trunk  presents  for  friends.  These  were  held 
not  to  be  baggage. 

4.  A  traveler  carried  a  hand  bag  into  the  car  and  left  it  in  his  seat  while 
he  went  to  the  smoking  car,  and  it  was  stolen.  The  baggage  was  not  in  the 
custody  of  the  carrier,  and  the  latter  was  not  liable  for  the  loss. 

71.  Telegraph  and  telephone  companies.  These  are  not  com- 
mon carriers.  A  few  jurisdictions  have  held  them  to  be  common 
carriers,  but  the  greater  number  treat  them  as  companies  render- 
ing a  public  service  and  bound  to  serve  all  persons  alike  and  for 
uniform  reasonable  compensation.  They  do  not  insure  the  safety 
and  accuracy  of  messages,  but  are  bound  to  use  reasonable  care 
and  are  liable  for  ordinary  negligence.  They  may  become  insurers 
by  contract  for  added  compensation. 

Whether  they  may  by  contract  stipulate  against  their  own  negli- 
gence is  a  disputed  question.  It  is  generally  held  that  they  may, 
but  some  courts  regard  such  contracts  as  against  public  policy. 
Where  such  contracts  are  upheld,  the  telegraph  companies 
refuse  to  become  liable  for  errors  in  transmission  unless  the 
sender  has  the  message  repeated  and  pays  an  added  compen- 
sation therefor. 

Either  the  sender  or  the  addressee  of  the  message  may  sue  in 
tort  for  damages  arising  from  the  negligence  of  the  company,  but 
only  the  sender  can  sue  for  breach  of  contract,  because  he  alone 
has  made  a  contract  —  unless,  indeed,  the  sender  was  actually  the 
agent  of  the  addressee  and  made  the  contract  in  his  behalf. 

It  is  generally  made  a  penal  offense  for  telegraph  companies 
or  any  of  their  employees  to  divulge  the  contents  of  telegrams  to 
anyone  except  the  addressee. 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  61.  Define  bailment ;  bailor;  bailee.  Is  a  finder  of  lost  property 
a  bailee.''  How  is  his  duty  fixed?  What  is  the  consideration  for  a  bailee's 
promise?  Can  one  who  does  not  own  property  bail  it  to  another?  Distinguish 
bailment  from  sale ;  from  barter ;  from  a  niutmon.  May  a  bailee  mix  the 
goods  with  other  like  goods? 


REVIEW  QUESTIONS  AND  PROBLEMS  119 

62.  State  the  two  classes  of  bailments.  State  the  subclasses  of  each.  What 
is  a  deposit ."  What  is  a  mandate .''  What  is  a  comtnodatum  }  What  is  a  pawn .? 
What  is  a  hiring.'*  State  three  general  and  two  special  cases  of  hired  services 
about  a  thing.    State  two  cases  not  strictly  bailment  but  treated  thereunder. 

63.  How  is  a  bailment  for  bailor's  sole  benefit  created.?  Is  it  a  contract.-' 
Must  the  bailor  know  of  it?  Must  the  bailee  consent  to  it?  What  are  the 
bailor's  obligations?  What  are  the  bailee's  duties?  How  much  care  must  he 
use?  Can  he  use  the  article?  Is  he  liable  if  the  article  is  lost?  When  is  this 
bailment  terminated  ? 

Problem  i.  A  bank  undertook  gratuitously  to  keep  in  its  vaults  a  locked 
chest  of  C's  containing  $50,000  in  gold.  The  bank  cashier  stole  it,  together 
with  money  belonging  to  the  bank,  and  absconded.    Is  the  bank  liable  to  C? 

Problem  2.  In  the  above  case  the  directors  learned  that  the  cashier  was 
engaged  in  heavy  stock  speculations,  but  took  no  steps  to  investigate  his 
conduct.    Result? 

64.  How  is  a  bailment  for  the  bailee's  sole  benefit  created?  Is  a  promise 
to  lend  enforceable,  and  why?  What  is  the  bailor's  duty?  What  arc  the 
duties  of  the  bailee?  How  much  care  must  he  use?  May  he  lend  the  article 
to  others?  May  he  use  it  for  a  purpose  not  agreed  upon?  May  the  bailee 
deliver  the  article  to  a  claimant  other  than  the  bailor?  How  is  this  bailment 
terminated  ? 

65.  Define  a  pledge.  How  is  it  created?  What  is  essential?  What  war- 
ranty does  the  pledgor  make?  Can  he  sell  the  pledged  article?  Can  the 
pledge  be  made  irredeemable?  What  are  the  duties  of  the  pledgee?  What 
care  must  he  use?  What  are  the  pledgee's  rights?  How  may  he  sell  the 
pledge?  Can  he  purchase?  When  is  the  pledge  terminated?  What  claim 
does  the  pledge  secure  ?  Who  are  pawnbrokers  ?  May  they  charge  more  than 
the  usual  rate  of  interest? 

Problem  j.  B  owed  a  bank  $5000.  He  then  borrowed  of  the  bank  $10,000 
and  pledged  300  shares  of  stock  as  security  for  the  loan.  B  then  became  in- 
solvent and  all  his  property  was  transferred  to  a  trustee  for  the  benefit  of  his 
creditors.  The  bank  sold  the  stock  for  $13,500.  paid  the  loan  of  $10,000, 
and  applied  the  surplus  $3500  on  the  prior  indebtedness.  The  trustee  sues 
the  bank  for  this  $3500.    Which  is  entitled  to  it? 

66.  How  is  a  bailment  by  hiring  a  thing  created?  Is  a  promise  by  the 
bailor  to  hire  it  to  the  bailee  enforceable?  What  does  the  bailor  warrant? 
What  is  his  duty  as  to  defects?  What  arc  the  rights  of  the  bailee?  What 
are  his  duties?  How  much  care  must  he  use?  If  a  third  person  injures  the 
article,  is  the  bailee  liable?  Is  he  liable  to  third  persons,  and  when?  Are 
they  liable  to  him?  Arc  they  liable  to  the  bailor?  Who  is  liable  in  case  the 
article  is  accidentally  destroyed?  If  the  bailee  uses  the  article  otherwise  than 
he  agreed,  what  is  the  result? 


I20  HAIKMKNT  [Cii.  V 

Problcnt  4.  C  hires  a  horse  and  carriage  of  X.  B  negligently  runs  into 
and  injures  the  carriage  to  the  extent  of  520.  C  sues  B  for  this  damage. 
May  he  recover? 

Problem  j.  As  above.  The  horse  falls  sick  while  C  is  on  a  journey. 
C  leaves  him  with  D  for  care  and  treatment.  D  sues  X  for  the  expense. 
Result  ? 

67.  What  are  the  classes  of  bailments  of  the  hiring  of  services  about  a 
thing  .^  What  are  the  duties  of  the  bailor  ?  How  is  compensation  fixed  ?  May 
the  bailee  recover  if  he  abandons  the  work  midway.?  May  he  recover  if,  after 
he  has  finished  the  work,  the  article  is  destroyed.?  What  are  the  duties  of  the 
bailee?  How  much  care  must  he  exercise?  What  is  the  bailee's  lien?  Who 
is  a  warehouseman?  May  he  mix  goods?  Who  are  wharfingers?  Is  a  safe 
deposit  a  warehouse?    Does  money  deposited  in  a  bank  create  a  bailment? 

Problem  6.  C  deposited  his  goods  in  B's  warehouse.  They  were  stolen. 
C  sues  B.  C  contends  it  is  for  B  to  show  that  he  used  due  care.  B  contends 
it  is  for  C  to  show  that  B  was  negUgent.    Which  is  right  ? 

68.  Who  are  innkeepers?  Is  a  steamship  an  inn?  Is  a  sleeping  car? 
Who  are  guests?  Must  an  innkeeper  receive  all  guests  who  apply?  What 
are  his  liabilities  as  to  a  guest's  goods?  State  three  holdings  on  this.  What 
do  statutes  provide?  What  is  the  innkeeper's  lien?  When  is  an  innkeeper 
an  ordinary  bailee  ? 

Problem  7.  C  drove  to  an  inn  and  had  his  horse  placed  in  the  stable  coh- 
nected  with  it.  The  horse  was  kicked  by  the  horse  of  another  traveler  and  its 
leg  broken.  C  sues  the  landlord  of  the  inn.  The  landlord  offers  to  prove  he 
was  not  negligent.    Would  such  proof  release  him  from  liability? 

Problem  8.  An  inn  is  accidentally  burned  and  a  guest's  clothes,  jewelry, 
etc.  are  destroyed.    Is  the  innkeeper  liable? 

Problem  g.  While  C  was  in  a  sleeping-car  berth,  and  while  asleep,  he  was 
robbed  of  his  money  and  watch.  Is  the  sleeping-car  company  liable  to  him 
for  this  loss? 

69.  Who  are  common  carriers?  What  two  things  distinguish  a  common 
carrier  from  a  private  carrier?  What  goods  must  a  common  carrier  accept? 
May  he  give  special  rates  ?  What  statutes  govern  rates  ?  How  can  a  common 
carrier  escape  liability  for  loss  of  goods  ?  What  is  an  act  of  God  ?  Who  is  a 
public  enemy  ?  When  is  the  shipper  at  fault  ?  What  are  inherent  infirmities 
in  the  goods?  May  a  shipper  contract  against  loss  by  above  causes?  May  he 
contract  against  loss  due  to  his  own  negligence  or  that  of  his  servants  ?  When 
does  his  liability  as  common  carrier  end?  What  is  the  liability  of  a  railway 
when  goods  reach  their  destination  and  are  placed  in  the  freight  house? 
When  goods  go  over  several  railways,  which  is  liable  for  damage  to  them? 
When  is  a  common  carrier  excused  for  nondelivery?  What  is  a  bill  of  lading? 
What  is  a  charter  party  ? 


REVIEW  QUESTIONS  AND  PROBLEMS  121 

Problem  lo.  B  owned  a  sloop  which  he  used  for  his  own  business.  On 
two  occasions  he  carried  goods  for  C.  On  the  second  occasion  the  sloop  was 
driven  ashore  (not  by  an  act  of  God  or  by  the  negligence  of  B)  and  the  goods 
were  injured.    Is  B  liable  to  C .? 

Problem  ii.  B  owns  a  vessel  running  regularly  between  two  ports  and 
carr}'ing  passengers  and  freight.  C  ships  goods  on  the  vessel.  It  is  destroyed 
by  fire  while  at  sea.    Is  B  liable  to  C  for  the  loss  of  the  goods? 

Probletn  12.  In  the  above  case  the  vessel  is  captured  by  a  war  vessel  of 
another  nation  with  which  B's  nation  is  at  war,  and  the  goods  are  confiscated. 
Is  B  liable  to  C? 

Problem  rj.  C  shipped  plate  glass  from  New  York  City  to  Marion,  N.C. 
The  glass  went  over  four  different  railroads.  At  Marion  it  was  found  to  be 
broken.  C  sues  the  B.  Railway,  which  delivered  the  glass  at  Marion.  The 
bill  of  lading  provided  that  "  no  carrier  shall  be  liable  for  loss  or  damage  not 
occurring  on  its  own  road,"  and  only  for  loss  by  negligence.  When  the  B. 
Railway  received  the  box,  there  was  no  sign  of  breakage,  nor  was  there  any 
when  it  reached  Marion,  until  the  box  was  opened.  The  B.  Railway  contends 
that  it  is  not  liable  unless  C  shows  that  the  breakage  occurred  on  its  road. 
C  contends  that  the  B.  Railway  must  show  that  it  was  not  negligent.  Which 
is  right.'' 

70.  Who  are  public  carriers?  Who  are  passengers?  What  is  the  liability 
of  a  public  carrier  for  safety  of  passengers,  and  what  for  safety  of  baggage? 
What  is  baggage  ?    May  the  carrier  limit  liability  for  its  loss  ? 

Problem  14.  C,  a  passenger,  brought  action  against  the  B.  Railway  for 
loss  of  baggage.  The  trunk  contained  very  valuable  dress  laces  worth  $10,000. 
C  was  a  wealthy  foreigner  traveling  in  this  country,  and  the  laces  were  a  part 
of  her  wearing  apparel.    Is  the  Railway  liable  for  these  laces? 

71.  Are  telegraph  and  telephone  companies  common  carriers?  What  is 
their  liability  ?  May  they  contract  against  their  negligence  ?  May  the  addressee 
of  a  message  sue  for  negligence?    llow  ? 


CHAPTER  VI 

INSURANCE  CONTRACTS 

72.  Nature  and  kinds  of  insurance.  Insurance  is  a  system  for 
distributing  the  losses  of  a  few  persons  among  a  large  class  of 
persons  similarly  situated.  This  is  accomplished  by  raising  a 
general  fund  through  small  contributions  by  many  persons,  each 
contributor  being  entitled  to  indemnity  out  of  the  fund  in  case 
a  loss  falls  upon  him.  If  looo  persons,  having  in  the  aggregate 
property  valued  at  $5,000,000,  pay  annually  into  a  common  fund 
I  per  cent  upon  this  valuation,  a  fund  of  $50,000  will  be  raised, 
out  of  which  losses  by  fire  falling  upon  any  of  these  persons  could 
be  paid.  If  these  1000  persons  live  in  widely  separated  parts  of 
the  country,  it  is  unlikely  that  many  of  them  will  suffer  losses 
by  fire  in  the  same  year. 

Almost  every  conceivable  risk  may  now  be  insured.  The  main 
heads  of  insurance  are  marine  insurance,  fire  insurance,  and  life 
insurance,  but  there  are  companies  which  insure  against  tornadoes, 
steam-boiler  explosions,  breakage  of  plate  glass,  defects  in  titles, 
defaults  or  embezzlements  by  agents,  injuries  to  employees, 
injuries  to  oneself,  and  numerous  other  hazards. 

Marine  insurance  —  that  is,  insurance  against  the  risk  of  the 
loss  of  vessels  and  cargoes  at  sea  —  is  probably  the  oldest  form 
of  insurance  and  has  been  traced  back  to  the  twelfth  or  thir- 
teenth century.  Fire  insurance  came  into  prominence  after  the 
great  London  fire  of  1666.  Life  insurance  began  practically  in 
the  eighteenth  century. 

In  marine  and  fire  insurance  the  properties  insured  are  classi- 
fied according  to  the  risk,  and  the  premium  is  higher  or  lower  as 
the  risk  is  greater  or  less.  In  life  insurance  only  those  persons 
who  are  regarded  as  good  risks  are  insured,  and  the  premiums 
are  graded  according  to  the  age  of  the  insured.  Statistics  have 
been  accumulated  upon  which  average  results  may  be  predicted 
and  the  premiums  based. 


§§73,74]  POLICIES  — DEFINITIONS  123 

73.  Kinds  of  policies.  The  policies,  or  contracts  of  insurance, 
issued  by  insurance  companies  are  of  various  kinds,  but  it  is 
necessary  to  distinguish  the  valued  and  the  open  policy. 

The  valued  policy  is  one  that  fixes  the  amount  to  be  paid  in 
case  of  loss.  These  policies  are  always  used  in  life  insurance, 
and  are  very  generally  used  in  the  insurance  of  ships,  though 
not  of  cargoes.  In  case  of  the  death  of  the  insured  or  the  loss 
of  the  ship  the  sum  specified  is  paid. 

The  open  policy  is  one  in  which  the  amount  to  be  paid  in  case 
of  loss,  not  exceeding  a  certain  sum,  is  left  to  be  fixed  after  the 
loss  occurs.    These  policies  are  generally  used  in  fire  insurance. 

Life-insurance  policies  are  either  the  life  policy,  payable  only  at 
the  death  of  the  insured,  or  the  endowment  policy,  payable  when 
the  insured  reaches  a  certain  age  or  upon  his  death  at  any  prior 
date.  There  is  also  a  term  policy  for  a  fixed  number  of  years, 
payable  only  if  the  insured  dies  within  that  time. 

74.  Definitions.  Insurance  is  a  contract  whereby  for  a  stipu- 
lated consideration  one  party  agrees  to  compensate  or  indemnify 
the  other  for  loss  on  a  specified  subject  by  specified  perils. 

The  insurer  is  the  one  agreeing  to  indemnify ;  he  is  some- 
times called  the  underwriter.  The  insured  is  the  one  to  whom 
the  promise  runs.  The  premium  is  the  agreed  consideration. 
The  policy  is  the  written  contract.  The  risk,  or  peril,  is  the 
event  insured  against.  The  insurable  interest  is  the  subject, 
right,  or  interest  to  be  protected ;  it  is  such  an  interest  as 
will  entitle  the  person  possessing  it  to  obtain  a  lawful  contract 
of  insurance  (see  sect,  y6  post). 

Life  insurance  is  a  contract  to  pay  a  designated  or  determi- 
nable person  a  certain  sum,  or  an  annuity,  in  the  event  of  the 
death  of  the  person  whose  life  is  insured.  Endowment  life 
insurance  is  a  contract  to  pay  a  certain  sum  or  annuity  to  the 
person  whose  life  is  insured  if  he  lives  a  certain  length  of,  time, 
or  to  a  designated  person  if  he  dies  before  this  time.  There  are 
various  forms  of  the  tontine,  or  dividend,  system.  An  endow- 
ment policy  is  a  form  of  investment  by  the  insured  as  well  as 
an  insurance  proper. 

Accident  insurance  is  a  contract  to  indemnify  the  insured 
against    personal    injury    resulting    from    accident,    and    usually 


124  INSURANCE  CONl'RACrS  L<^"- VI 

includes  a  contract  to  pay  a  si5ccificd  sum  to  his  estate  or  to  a 
designated  person  in  case  of  death  resulting  from  accident. 

Workmen  s  compensation  insurance  is  a  contract  to  indemnify 
an  employer  against  loss  suffered  from  having  to  pay  to  an  em- 
ployee a  sum  due  because  of  injuries  sustained  by  the  employee 
in  the  course  of  his  employment. 

Marine  insurance  is  a  contract  to  indemnify  the  insured 
against  loss  to  property  (ships  and  cargo)  arising  from  the 
perils  of  the  sea  during  a  certain  voyage  or  a  certain  period  of 
time.  It  may  be  issued  to  cover  risks  arising  on  any  navigable 
waters,  whether  sea  or  inland. 

Fire  insurance  is  a  contract  to  indemnify  the  insured  against 
loss  of  property  or  damages  to  it  by  fire. 

Casualty  insurance  is  a  contract  to  indemnify  the  insured 
against  damage  to  property  arising  from  accidents,  such  as 
boiler  explosions,  floods,  tornadoes,  hail,  failure  of  crops,  break- 
age of  -plate  glass,  death  of  cattle,  burglary,  etc. 

Guaranty  and  fidelity  insurance  is  a  contract  to  indemnify  the 
insured  against  loss  arising  from  fraud  or  dishonesty  of  agents 
(fidelity  insurance)  ;  the  negligence  of  employees  resulting  in 
damage  to  other  employees  for  which  the  employer  is  obliged 
to  pay  (employers'  liability  insurance)  ;  the  injury  to  passengers 
for  which  the  carrier  is  obliged  to  pay  damages  (carriers'  lia- 
bility insurance)  ;  the  insolvency  or  dishonesty  of  debtors  (credit 
insurance)  ;  the  failure  of  tenants  to  pay  rent  or  the  loss  of  rents 
incident  to  fires  or  other  injury  to  premises  (rent  insurance)  ;  the 
defect  or  failure  of  title  to  real  property  (title  insurance)  ;  or  the 
interruption  to  business  by  strikes  among  employees  (strike 
insurance). 

.  Reinsurance  is  a  contract  whereby  the  reinsurer  agrees  to 
assume  the  risk,  in  whole  or  in  part,  which  was  undertaken  by 
the  original  insurer.  If  the  reinsurance  policy  binds  the  rein- 
surer to  pay  the  insured,  the  latter  may  maintain  an  action 
against  the  reinsurer  upon  the  theory  of  a  promise  made  to  one 
person  for  the  benefit  of  another  person  (see  sect.  33  ante) ;  but 
in  the  absence  of  such  a  clause  the  insured  can  look  to  the  origi- 
nal insurer  alone,  and  the  original  insurer  will  look  to  the  rein- 
surer for  indemnity.     It  often  happens  that  an  insurer  takes  a 


I 


§75]  CHARACTERISTICS  125 

very  large  risk  and  thinks  it  prudent  to  divide  it  by  reinsuring 
some  portion  of  it  in  another  company.  The  reinsurance  is  a 
kind  of  guaranty  insurance. 

75.  Characteristics.  There  are  these  main  characteristics  in 
the  insurance  contract. 

1 .  The  contract  is  aleatory  ;  that  is,  depending  upon  an  uncer- 
tain event.  It  is  a  wagering  contract.  If  one  insures  property 
or  a  life  in  which  he  has  no  insurable  interest,  the  contract  is 
called  a  wager  and  is  illegal.  If  he  has  an  insurable  interest, 
the  contract  is  valid,  although  it  is  still  in  the  nature  of  a  wager. 

2.  The  contract  is  one  of  indemnity ;  that  is,  to  make  good 
against  loss  in  the  event  that  loss  occurs.  In  the  open  policy 
the  amount  of  the  loss  is  to  be  ascertained  after  it  occurs.  In 
the  valued  policy  the  parties  agree  in  advance  upon  the  value 
of  the  subject  matter  of  the  contract ;  if  it  is  then  destroyed, 
the  loss  is  taken  to  be  that  so  fixed  by  the  parties.  In  life- 
insurance  policies  the  sum  is  always  fixed,  subject  to  a  possible 
increment  by  way  of  dividends. 

There  is  one  important  difference  between  an  open  fire  policy  and  an  open 
marine  policy.  If,  in  an  open  fire  policy  for  $10,000  upon  property  worth 
$20,000,  property  worth  $5000  is  destroyed,  the  insured  recovers  its  full 
value.  In  an  open  marine  policy  he  would  recover  only  that  proportion  of 
the  amount  insured  ($10,000)  which  the  loss  ($5000)  bears  to  the  true 
value  of  the  property  insured  (520,000);  namely,  one  fourth,  or  $2500.  In 
order  to  be  fully  protected  in  a  marine  risk,  the  insured  must  insure  to  the 
full  value  and,  of  course,  pay  a  larger  premium. 

Another  incident  of  the  indemnity  feature  is  that  if  the  property  insured 
be  destroyed  by  the  negligent  act  of  a  third  person,  so  that  the  owner 
might  maintain  an  action  against  the  wrongdoer  for  the  damage,  the  insurer, 
upon  paying  the  loss  to  the  insured,  is  subrogated  (that  is,  substituted)  to 
the  rights  of  the  insured  in  such  action.  Were  it  otherwise,  the  insured  would 
recover  his  loss  twice  over.  This  does  not  apply,  however,  to  life  insurance 
where  the  insured  is  killed  by  the  wrongful  or  negligent  act  of  another. 

If  the  insured  has  two  fire  policies  in  different  companies  upon  the  same 
property,  the  companies  contribute  ratably  to  indemnify  for  any  loss.  If  one 
pays  the  whole  loss,  it  may  secure  a  ratable  contribution  from  the  other. 

3.  The  contract  indemnifies  even  against  the  carelessness 
or  negligence  of  the  insured.  This  is  highly  inijjortant,  because 
if  the  insurer  could  defend  after  loss  upon  the  ground  that  the 
insured,  by  his  negligence,  contributed  to  the  disaster,  tin-  j^olicy 


126  INSURANCE  CONTRACTS         [Cu.  VI 

wcHiUl  not  be  nearly  so  valuable  a  security  against  serious  pecu- 
niaiy  losses.  It  does  not  indemnify  against  willful  destruction  by 
the  insured,  except  that  suicide  will  not,  by  the  weight  of  author- 
ity, defeat  a  life-insurance  policy  unless  tiie  insured  can  be  shown 
to  have  taken  out  the  policy  with  the  intent  to  commit  suicide. 
There  are  also  many  terms  and  some  warranties  in  insurance 
contracts,  the  breach  of  which  may  prevent  the  insured  from 
recovering ;  for  example,  in  accident  policies,  that  the  insured 
shall  not  voluntarily  expose  himself  to  unnecessary  risks,  or  in 
fire  policies,^  that  the  insured  shall  use  reasonable  care  and  means 
to  save  property  after  a  fire  begins. 

The  case  of  suicide  has  caused  the  courts  much  perplexity.  The  federal 
courts  and  some  state  courts  refuse  to  allow  the  estate  of  the  deceased  to 
recover  where  the  insured  committed  suicide  when  sane,  regarding  it  as 
against  public  policy.  Some  states  allow  a  third  person  named  as  benefi- 
ciary to  recover  where  they  do  not  allow  the  estate  of  the  deceased  to 
recover.  All  courts  allow  a  recovery  in  any  case  where  the  insured  com- 
mitted suicide  while  insane,  unless  the  policy  expressly  excepts  that  risk ; 
but  the  exception  of  the  risk  of  "  death  by  suicide "  covers  only  suicide 
while  sane ;  in  order  to  exempt  the  insurer  the  policy  should  read  "  death 
by  suicide  whether  sane  or  insane  excepted."  One  or  two  states  have  by 
statue  forbidden  insurance  companies  to  insert  such  a  clause. 

In  case  the  insured  is  executed  by  the  law  for  a  capital  offense  the  insurer 
will  not  be  liable  on  the  policy,  even  though  that  risk  is  not  expressly  excepted. 

Many  life-insurance  policies  now  contain  a  clause  declaring  the  policy 
to  be  incontestable  after  a  certain  period  (say  two  or  three  years  after  it 
is  issued).  In  such  case  it  is  generally  held  that  the  insurer  can  contest 
the  policy  only  for  a  lack  of  any  insurable  interest  or  for  actual  fraud  in 
procuring  it. 

4.  The  insured  must  have  an  insurable  interest  (see  sect.  jG). 

5.  The  contract  requires  the  highest  good  faith  on  the  part  of 
the  insured  (see  sect.  TJ). 

6.  The  contract  contains  warranties,  the  breach  of  which  may 
avoid  the  policy  (see  sect,  78). 

7.  The  statutes  often  prescribe  the  form  of  policy  which  must 
be  issued  (see  sect.  79).  Insurance  contracts  may  be  oral.  Stat- 
utes prescribing  a  form  of  policy  do  not  prevent  oral  contracts,  but 
subject  an  oral  contract  to  the  provisions  of  the  statutory  policy. 
It  is  usual  in  large  insurance  oflfices  to  issue  to  the  in.sured  tem- 
porarily a  "binding  slip,"  which  is  a  brief  memorandum  of  the 


§76]  INSURABLE  INTEREST  127 

insurance  contract  and  gives  protection  pending  the  delivery  of 
the  formal  insurance  policy. 

76.  The  insured  must  have  an  insurable  interest.  In  order 
that  a  policy  may  be  valid  it  is  necessary  that  the  one  taking  it 
out  shall  have  an  insurable  interest  in  the  property  or  the  life 
upon  which  the  policy  is  issued. 

1.  Insurable  interest  in  property.  An  insurable  interest  in 
property  is  an  interest  in  property,  or  a  liability  in  respect  of 
property,  of  such  a  nature  that  the  loss  of  the  property  might 
cause  a  pecuniary  injury  to  the  one  possessing  such  interest  or 
under  such  liability. 

Exa>nple.  A  pledgee  has  such  an  interest  in  the  pledge  that  its  destruction 
would  or  might  result  in  a  pecuniary  loss  to  him ;  so  also,  of  course,  has  the 
pledgor.  Both  the  mortgagor  and  the  mortgagee  of  property  have  an  insurable 
interest.  A  stockholder  has  an  insurable  interest  in  the  property  of  the  cor- 
poration. A  farmer  has  an  insurable  interest  in  crops  to  be  raised  in  the  future 
upon  his  land.  A  mere  expectancy,  like  that  of  an  heir  who  e.xpccts  to  inherit 
his  ancestor's  property,  does  not  create  an  insurable  interest.  If  one  insures 
his  property  and  afterwards  sells  it,  the  policy  does  not  pass  to  the  new  owner 
without  an  assignment  with  the  consent  of  the  insurer. 

2.  Insurable  interest  in  a  life.  This  is  very  difficult  to  define. 
Any  reasonable  expectation  of  pecuniary  benefit  from  the  con- 
tinued life  of  another  creates  an  insurable  interest  in  that  life. 
If  one  depends  upon  another  for  support  or  education,  in  whole 
or  in  part,  he  has  an  insurable  interest  in  that  other's  life.  Thus, 
a  wife  has  an  insurable  interest  in  the  life  of  her  husband.  If  one 
is  entitled  to  the  services  of  another,  he  has  an  insurable  interest 
in  that  other's  life.  Thus,  a  husband  has  an  insurable  interest  in 
the  life  of  his  wife,  and  a  father  has  an  insurable  interest  in  the 
life  of  his  minor  children.  If  one  has  a  pecuniary  claim  uix)n 
another,  he  may  insure  that  other's  life.  Thus,  a  creditor  has  an 
insurable  interest  in  the  life  of  his  debtor.  Mere  relationship  by 
blood  or  marriage  does  not  of  itself  create  an  insurable  interest. 
One  brother  has  no  in.surablc  interest  in  the  life  of  another 
brother  merely  because  of  the  relationship  ;  he  might  have  if  he 
were  dependent  upon  the  brother.  One  may  value  his  interest 
in  his  own  life,  or  in  the  life  of  one  upon  whom  he  depends,  or 
to  whose  services  by  virtue  of  family  relationshij)  he  is  entitled, 


128  INSURANCE  CONTRACTS  [Cu.  VI         , 

at  any  sum  agreed  upon  ;  but  a  creditor  cannot  insure  the  life  of 
his  debtor  for  a  sum  greatly  in  excess  of  the  debt.  It  seems  to 
be  necessary  tliat  the  person  whose  life  is  insured  by  another 
should  consent  to  the  insurance,  but  this  matter  is  in  some  doubt. 
There  are  grounds  of  public  policy  whicii  might  recjuire  the  con- 
sent of  a  jxM'son  to  have  insurance  taken  out  u])on  his  life. 

The  insurable  interest  in  property  must  continue  throughout 
the  term  of  the  policy,  or  at  least  exist  at  the  time  of  the  loss. 
It  is  enough  in  life  insurance  that  it  exist  at  the  time  the  policy 
is  taken  out.  So  also  in  life  insurance  the  policy  may  be  assigned 
to  one  who  has  no  insurable  interest,  if  it  was  taken  out  in  good 
faith  by  one  who  had  an  insurable  interest ;  and  the  insured  may 
make  his  policy  payable  to  anyone  if  he  takes  it  out  himself. 
Where  a  policy  designates  the  beneficiary,  the  right  under  the 
policy  becomes  vested  in  such  beneficiary  and  cannot  be  disturbed 
without  his  consent,  except  in  mutual-benefit  insurance  —  such,  for 
example,  as  that  provided  by  fraternal  orders.  Should  the  bene- 
ficiary die,  however,  before  the  insured,  a  new  beneficiary  may 
be  named. 

77.  The  contract  of  insurance  is  one  requiring  the  highest  good 
faith.  In  ordinary  contracts  a  party  is  not  bound  to  disclose  what 
he  knows  about  the  subject  matter  of  the  contract ;  it  is  for  the 
other  party  to  discover  whatever  he  may  deem  important.  So  long 
as  there  is  no  misrepresentation  the  contract  is  valid  and  bind- 
ing, notwithstanding  the  fact  that  one  party  knew  and  did  not 
disclose  certain  material  defects  ;  but  insurance  contracts  stand 
upon  a  peculiar  basis  in  this  respect. 

1.  Concealment.  The  insured  is  bound  to  disclose  to  the  in- 
surer every  material  fact  known  to  him  which  affects  the  risk. 
But  this  rule  is  qualified  in  the  United  States,  except  as  to  marine 
insurance,  by  requiring  that  bad  faith  be  shown  in  order  to  avoid 
a  policy  because  of  concealment. 

Examples :  i .  An  attempt  has  been  made  to  burn  B's  property.  B  becomes 
alarmed  and  effects  insurance  without  disclosing  this  fact.  The  policy  may  be 
avoided  by  the  insurer  upon  the  ground  of  B's  concealment. 

2.  B  effects  insurance  upon  his  house,  omitting  to  state  that  it  is  within  a 
few  feet  of  a  fireworks  manufactory.  This  concealment  as  to  the  risk  is  fatal 
to  the  validity  of  the  policy. 


§7SJ  WARRANTIES  129 

The  rule  is  very  strict  in  marine  insurance  and  extends  to  inno- 
cent nondisclosure  due  to  forgetfulness  or  inadvertence,  but  in 
fire  and  life  insurance  it  now  probably  extends  in  this  country 
only  to  intentional  concealment  of  some  material  fact,  amounting 
to  bad  faith.  Where  the  insurer  asks  a  series  of  questions  in  an 
application  blank,  a  truthful  answer  to  these  questions  is  all  that 
is  generally  required ;  but  even  in  this  case  the  insured  cannot 
intentionally  conceal  a  highly  material  fact,  as  that  an  attempt  has 
been  made  to  set  fire  to  the  property. 

2.  Representations.  Representations  are  statements  as  to  ma- 
terial, existing  facts,  made  by  the  insured,  usually  to  give  informa- 
tion concerning  the  risk,  and  inducing  the  insurer  to  issue  a 
policy,  but  which  do  not  become  terms  in  the  contract  itself.  A 
material  false  representation,  however  innocently  made,  will  avoid 
the  policy  ;  there  is  an  implied  condition  that  a  policy  shall  be  en- 
forceable only  if  the  representations  which  induced  the  insurer  to 
issue  it  are  true.  But  a  representation  as  to  future  conduct,  that 
is,  a  promissory  representation,  is  not  technically  a  representation, 
because  not  made  as  to  an  existing  fact.  It  is  of  no  effect  unless 
it  is  made  a  term  in  the  policy.  So  representations  as  to  opinion 
or  belief  are  not  material ;  no  one  should  rely  upon  them. 

Examples :  3.  B  insures  C's  warehouse.  C  by  mistake  states  that  there  is 
already  5200,000  of  insurance  on  the  building;  there  was  in  fact  but  530,000. 
This  is  material,  since  with  $200,000  of  insurance  B's  ratable  portion  in  case 
of  loss  would  be  less  than  if  there  were  but  $30,000.  If  the  building  burns, 
C  can  recover  nothing  from  B.  It  makes  no  difference  that  C  believed  his 
statement  to  be  true. 

4.  C  orally  states  to  B  that  if  B  insures  his  building  he  (C)  will  cease  using 
a  certain  fireplace  in  it.  The  building  burns.  B  seeks  to  avoid  the  policy  by 
showing  that  C  continued  to  use  the  fireplace.  This  is  a  promissory  statement 
and  it  will  not  avoid  the  policy.  If  B  wants  the  benefit  of  a  promise,  he  must 
incorporate  it  into  the  written  contract. 

78.  Warranties.  Unless  there  be  a  waiver  of  it,  or  an  estoppel 
t(;  set  it  up,  the  breach  of  a  warranty  in  an  insurance  contract 
will  avoid  the  policy, 

I.  Warrantu's  explained.  A  warranty,  is  a  statement  or  promise 
which  is  included  in  the  policy  itself,  or  in  a  separate  jxiper  in- 
corporated into  the  policy  by  reference,  and  which  is  made  an 
essential   part  of  the  contract.     Its  falsity  or  nonfuKilhm-nt  will 


130  INSURANCE  CONTRACTS  [Ch.  VI 

avoid  the  policy.  A  representation  is  merely  an  inducement  to 
the  making  of  the  contract.  A  warranty  is  a  part  of  the  contract 
itself.  Rcjiresentations  must  be  shown  to  be  material,  and  it  is 
enou»;h  that  they  are  substantially  complied  with.  W^arranties  are 
material  because  inserted  in  the  contract,  and  they  must  be  strictly 
and  literally  complied  with.  They  may  be  either  affirmative  of  an 
existing  fact  or  promissory.  Note  that  "  warranty  "  has  one  mean- 
ing in  insurance  contracts  and  another  in  contracts  of  sale  (see 
sects.  53,  54,  57  autc).  In  the  latter  the  buyer  may,  under  the 
Uniform  Sales  Act,  treat  the  warranty  as  collateral  or  as  vital, 
while  in  the  former  it  is  always  a  vital  term  in  the  main  contract. 
If  a  warranty  in  a  sale  is  broken,  the  buyer  may  elect  between 
an  action  for  damages  and  rescission  :  but  if  a  warranty  in  insur- 
ance is  broken,  it  discharges  the  contract ;  no  action  for  damages 
for  its  breach  results. 

Examples  .•  i .  B  represents  that  his  vessel  has  twelve  guns  and  twenty 
men.    She  has  substantially  this  number  and  the  policy  is  good. 

2.  B  warrants  that  his  vessel  has  twelve  guns  and  twenty  men.  She  has 
substantially  this  number,  but  the  policy  is  avoided  because  there  is  a  breach 
of  the  warranty  in  not  having  precisely  the  armament  and  force  warranted. 

3.  B  represents  that  ashes  are  taken  out  of  his  factory  in  iron  hods.  They 
are  taken  out  in  copper  hods.  The  representation  is  substantially  true  and  the 
policy  is  binding.  But  if  B  warrants  that  the  ashes  are  taken  out  in  iron  hods, 
there  is  a  breach  of  the  warranty  and  the  policy  is  avoided.  (So  stringent  is 
this  rule  that  the  courts  incline  to  hold  statements  to  be  representations  when 
possible,  and  some  states  have  statutes  to  relieve  against  forfeitures  for  tech- 
nical breaches  of  warranty.) 

4.  B,  in  answer  to  the  printed  questions  which  are  made  by  reference  a 
part  of  the  policy,  states  that  he  is  thirty  years  old.  He  is  in  fact  thirty-five. 
The  policy  is  not  binding  on  the  insurance  company.    This  is  a  warranty. 

5.  B  states  as  a  warranty  that  the  building  insured  is  used  "  for  winding 
and  coloring  yarn."  He  afterwards  uses  the  building  for  another  purpose. 
There  is  no  breach  of  warranty.  He  did  not  warrant  that  the  building  would 
continue  to  be  used  for  the  purpose  it  was  used  for  when  the  policy  was 
taken  out. 

These  rules  as  to  warranties  are  so  strict  and  work  so  many 
hardships  that  statutes  in  many  states  provide  in  substance  that 
warranties  shall  not  avoid  an  insurance  policy  unless  they  are  in 
fact  material.    This  makes  warranties  more  like  representations. 

In  general,  courts  will,  if  possible,  construe  an  insurance  policy 


§79]  STANDARD  POLICIES  131 

so  as  to  save  the  just  rights  of  the  insured  against  forfeiture  for  a 
merely  technical  breach  that  does  not  in  fact  injure  the  insurer. 

2.  Waiver  and  estoppel.  The  doctrines  of  waiver  and  estoppel 
are  frequently  invoked  to  prevent  the  insurer  from  taking  advan- 
tage of  a  misrepresentation  or  breach  of  warranty  by  the  insured. 
Waiver  is  the  voluntar}^  relinquishment  of  a  known  right.  Estop- 
pel is  a  bar  raised  by  the  law  to  prevent  one  party  from  denying 
that  he  has  relinquished  a  right  when  by  his  conduct,  though 
unintentionally,  he  has  led  the  other  party  reasonably  to  rely 
upon  the  conclusion  that  he  has  relinquished  it. 

Examples :  6.  A  policy  provides  that  it  shall  be  forfeited  if  the  insured 
increases  the  risk.  The  insured  increases  the  risk  by  using  the  property  for 
manufacturing  puposes.  The  insurer  with  knowledge  of  the  facts  tells  the 
insured  that  the  forfeiture  is  waived ;  this  is  binding.  Again  with  knowledge 
of  the  facts  the  insurer  accepts  the  premium ;  this  estops  the  insurer  from 
denying  that  he  has  waived  the  forfeiture. 

7.  The  policy  provides  that  if  the  building  insured  is  on  leased  ground,  the 
policy  shall  be  forfeited.  Although  this  is  a  warranty  that  the  building  is  not 
on  leased  ground,  still  if  the  insured  informed  the  insurer,  when  the  application 
was  made,  that  the  building  was  on  leased  ground,  the  insurer  is  estopped  to 
set  up  a  forfeiture.^ 

Whether  a  particular  agent  has  authority  to  waive  a  stipulation 
in  the  policy  is  often  a  question  of  great  nicety.  W'hether  a  re- 
striction upon  an  agent's  authority  contained  in  the  policy  itself 
will  operate  as  notice  to  the  insured  of  such  restricted  authority 
is  a  question  upon  which  the  decisions  arc  inharmonious.  The 
weight  of  authority  is  that  the  agent  who  issues  the  policy  may 
make  a  contemporaneous  waiver,  although  he  might  not  have 
authority  to  make  a  subsequent  one. 

79.  Statutory  or  standard  policies.  In  order  to  avoid  the  diffi- 
cult questi()ns  and  the  uncertainties  raised  by  the  widely  differing 
forms  of  fire-insurance  policies,  many  states  have  passed  statutes 
requiring  the  insurance  companies  to  issue  a  uniform  standard 
policy  prescribed  by  the  statute  itself.     The  leading  form  is  the 

'  Massachusetts  and  New  Jersey  hold  that  there  is  no  waiver  or  estoppel  in  such 
a  case,  hecau.se  they  refuse  to  permit  a  written  stipulation  to  be  varied  by  parol  evi- 
dence u{  prior  or  contemporaneoui  oral  communications,  though  it  niij^ht  be  varied 
by  subsequent  communications.  It  is  the  theory  that  ail  prior  and  contemporaneous 
communications  arc  merRcd  in  the  written  contract.  This  is  the  doctrine  held  by 
the  United  States  Supreme  Court  also. 


132  INSURANCE  CONTRACTS  [Cii.  VI 

New  York  standard  policy.  Copies  of  this  may  be  obtained  of  any 
fire-insurance  agent,  and  it  should  be  carefully  read  by  all  who 
carry  fire  insurance,  in  order  that  there  may  be  no  inadvertent 
violation  of  the  terms  by  the  insured.  Massachusetts  has  a 
standard  policy  which  differs  in  some  important  particulars  from 
that  of  New  York, 

For  example,  the  New  York  form  provides  that  the  policy  shall  be  void  if 
the  building  insured  becomes  vacant  or  unoccupied  and  so  remains  for  ten 
days,  while  the  Massachusetts  form  allows  thirty  days.  Many  clauses  found  in 
the  New  York  form  are  absent  from  the  Massachusetts  form.  For  example, 
the  New  York  form  provides  that  the  policy  shall  be  void  "if  the  interest 
of  the  insured  be  other  than  unconditional  and  sole  ownership,"  or  "  if  the 
building  be  on  ground  not  owned  by  the  insured  in  fee  simple,"  or  "  if  per- 
sonal property  be  or  become  encumbered  by  a  chattel  mortgage,"  while  the 
Massachusetts  policy  is  silent  as  to  all  of  these  conditions. 

80.  Marine  insurance.  In  the  insurance  of  a  ship  or  cargo 
against  risks  at  sea  there  are  always  three  implied  warranties  : 
namely,  that  the  ship  is  seaworthy,  that  there  shall  be  no  vol- 
untary deviation  from  a  specified  route,  and  that  the  adventure 
shall  be  for  a  legal  purpose. 

General  average  is  a  contribution  made  by  the  various  owners 
of  a-  ship  and  cargo  toward  a  loss  sustained  by  one  owner  whose 
property  has  been  voluntarily  sacrificed  for  the  common  safety, 
as  where,  in  a  storm,  goods  are  cast  overboard  to  lighten  the 
ship.  But  the  one  whose  goods  are  thrown  over  loses  his  pro 
rata  share  of  the  goods  also.  Throwing  property  over  for  such 
a  purpose  is  called  jettison.  General  average  is  a  rule  of  the 
admiralty  courts  based  upon  the  usages  of  maritime  commerce. 

Example.  B's  property,  valued  at  $4800,  is  cast  overboard  in  order  to  save 
the  ship  and  the  rest  of  the  cargo.  The  ship  is  valued  at  $50,000 ;  it  earns 
$2000  on  the  goods  saved  and  loses  $200  on  the  goods  jettisoned ;  the  rest  of 
the  cargo  is  C's  and  is  valued  at  $43,000. 

Loss:  S4800  -f-  $200  =  $5000. 

Contributors:   $4800  -f  $200  -I-  $52,000  -F  $43,000  =  $100,000. 

Percentage  loss  for  each,  5  per  cent. 

B  gets  $4800  —  $240  =  $4560,  of  which  the  ship  pays  $2600  — $190 
=  $2410,  and  C  pays  $2150. 

This  is  a  rule  in  admiralty  only.  If  B's  building  is  torn  down  to  stay  the 
spread  of  fire,  he  recovers  no  contribution  from  property  thus  saved. 


§80]  REVIEW  QUESTIONS  AND  PROBLEMS  133 

A  marine  insurer  is  bound  to  make  good  to  the  owners  of 
property  saved  the  contribution  they  pay  to  one  whose  property 
was  sacrificed.  So  also  the  marine  insurer  is  bound  to  pay  in 
full  the  loss  of  the  one  whose  goods  were  sacrificed,  and  is 
then  subrogated  to  his  rights  of  contribution  against  those  whose 
property  was  saved. 

If  the  policy  on  a  vessel  or  goods  is  merely  a  fire  policy  and  not 
a  marine  policy,  the  rule  of  general  average  has  no  application. 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section'  72.  Explain  the  system  and  object  of  insurance.  How  did  it 
originate.''     How  are  premiums  fixed? 

73.  Distinguish  between  valued  and  open  policies.  Distinguish  life, 
endowment,  and  term  policies. 

74.  Define  insurance;  insurer;  insured;  premium;  policy;  risk;  insurable 
interest.  What  is  life  insurance?  What  is  accident  insurance?  marine  insur- 
ance? fire  insurance?  casualty  insurance?  guaranty  or  fidelity  insurance  and 
its  kinds?  What  is  reinsurance?  May  the  party  originally  insured  recover 
against  the  reinsurer? 

75.  Name  the  characteristics  of  the  insurance  contract.  Is  it  a  wagering 
contract  ?  Is  it  an  indemnity  contract,  and  why  ?  How  much  may  be  recovered  ? 
How  much  in  an  open  marine  policy?  If  one  has  two  policies,  how  is  the  loss 
adjusted  ?  What  is  subrogation  ?  May  one  recover  insurance  on  his  building 
burned  by  his  own  negligence?  If  the  insured  commits  suicide,  may  his  estate 
recover  on  the  policy?    May  an  insurance  contract  be  by  parol? 

76.  What  is  an  insurable  interest  in  property?  Illustrate.  What  is  an 
insurable  interest  in  a  life?  Illustrate.  When  and  for  how  long  must  the 
insurable  interest  exist? 

Problem  i.  C  owned  a  patent  and  leased  the  exclusive  use  of  it  to  B.  C 
then  insured  the  property  used  by  B  in  order  to  protect  the  claim  for  royalties 
for  the  use  of  the  patent.  B's  property  burned.  The  insurance  company 
claims  C  had  no  insurable  interest  in  B's  property.    Result? 

Problem  2.  C  is  a  stockholder  in  a  corporation.  He  insures  the  corporate 
property,  which  afterward  burns.    Had  he  an  insurable  interest? 

Problem  J.  .\n  uncle  insured  his  nephew's  life.  Upon  the  nephew's  death 
the  insurance  company  resisted  payment  of  the  policy  upon  the  ground  that 
the  uncle  had  no  insurable  interest  in  the  nephew's  life.    Result? 

77.  In  what  important  respect  do  insurance  contracts  differ  from  ordi- 
nary contracts?  What  is  the  duty  of  the  insured  as  to  disclosures?  How  has 
the  rule  been  modified?  What  arc  representations?  What  arc  promissory 
representations?    What  is  the  effect  of  innocent  misrepresentations? 


134  INSURANCE  CONTRACTS  [Cii.  VI 

Problem  4.  C's  building  is  threatened  from  a  neighboring  fire.  He  at 
once  secures  insurance  on  it,  concealing  the  danger.  Is  the  policy  binding 
on  the  insurance  company.' 

Problem  j.  C  secured  insurance  on  the  life  of  X.  No  information  con- 
cerning X's  habits  was  asked  or  given,  but  other  questions  were  asked  and 
truthfully  answered.  X  was  to  C's  knowledge  very  intemperate.  Is  the  policy 
binding  on  the  insurance  company.'' 

Problem  6.  C  secures  insurance  on  a  vacant  building  and  states  orally 
that  it  will  be  occupied.  It  is  not  occupied,  and  it  burns.  Is  the  insurance 
company  liable.'* 

78.  What  is*a  warranty.?  How  docs  it  differ  from  warranty  in  a  con- 
tract of  sale.?     How  must  it  be  fulfilled?    Distinguish  it  from  representation. 

What  is  a. waiver?  What  is  an  estoppel?  What  is  the  effect  of  a  breach 
of  representation  or  of  warranty? 

Problem  7.  C  in  the  written  application  for  insurance  on  his  building 
(which  becomes  a  part  of  the  policy)  states  that  "  there  is  a  watchman 
nights."  The  fire  occurred  on  Sunday  morning  before  daylight  when  there 
was  no  watchman.  C  tries  to  show  a  custom  not  to  keep  watchmen  after 
twelve  o'clock  Saturday  night.  Should  he  be  permitted  to  do  so?  Is  the 
warranty  broken? 

Problem  8.  C  represents  his  building  as  "  occupied  as  a  dwelling  house." 
(a)  It  is  in  fact  vacant.  Is  the  insurance  valid?  (b)  It  is  occupied  when 
insured,  but  afterwards  becomes  vacant.  Two  days  later  it  burns.  May  C 
recover  the  insurance? 

79.  What  is  the  standard  policy?  Must  it  be  used?  How  are  its  terms 
fixed  ? 

80.  What  three  implied  warranties  in  marine  insurance?  What  is  general 
average?    What  is  jettison? 

Problem  g.  (a)  B's  cargo  is  worth  $29,000 ;  the  freight  to  be  paid  on  it 
is  $1000.  B's  goods  are  thrown  overboard  to  save  a  ship  in  a  storm.  The 
ship  and  the  rest  of  the  cargo  are  saved.  The  ship  is  worth  $50,000  and 
earns  on  the  voyage  $2000  net  freight  (not  including  that  on  B's  goods). 
C's  goods  are  worth  $33,000  and  D's  are  worth  $35,000.  Figure  the  general 
average  and  how  much  B  will  receive  and  how  much  he  will  lose ;  how 
much  the  ship  will  receive  and  how  much  it  will  lose,  {b)  In  case  B's  goods 
are  fully  insured  and  the  insurance  is  paid  him,  what  are  the  rights  of  the 
insurance  company? 


PART   III.    PARTICULAR  CONTRACTS 
CONCERNING  CREDITS 

CHAPTER  VII 

CREDITS  AND  LOANS 

81.  Capital  and  credit;  money  and  exchange;  payment.  In 
the  conduct  of  a  business  it  is  necessary  to  consider  the  subjects 
of  capital,  credit,  money,  exchange,  and  the  mode  and  effect  of 
payments. 

I.  Capital.  In  any  business  enterprise  capital  is  the  total 
amount,  vicasiircd  in  money,  that  is  invested  in  the  business. 
This  capital  sum  is  divided  into  that  which  goes  to  provide  a 
business  plant,  equipment,  stock,  etc.  and  that  which  remains  in 
available  cash  after  these  are  installed.  The  latter  is  the  working 
capital,  for  the  equipment  and  stock  must  be  kept  intact  or,  if 
stock  is  sold,  as  in  merchandising,  it  must  be  replaced  in  order 
that  the  business  may  go  on.  The  working  capital  should  be 
sufficient  to  enable  the  business  to  be  carried  on  when  collections 
are  slow  or  when  debtors  become  insolvent.  Some  of  it  may  be  in- 
vested in  live  interest-bearing  securities,  which  in  case  of  need  can 
be  quickly  sold  or  used  as  collateral  security  for  temporary  loans. 

An  individual,  partnership,  or  corporation  starts  a  manufacturing  business. 
The  plant  and  equipment  cost  $100,000.  The  annual  manufactured  product 
amounts  to  $1,500,000.  It  costs  $600,000  for  raw  material  and  $800,000  for 
labor,  repairs,  insurance,  and  other  expenses,  leaving  an  annual  profit  of 
$100,000.  How  much  working  capital  should  there  be  over  and  above  the 
plant  and  equipment.?  This  will  depend  upon  the  readiness  of  sales  and  col- 
lections, and  upon  other  considerations.  But  if  the  manufacturer  wishes  to  be 
able  to  carry  on  his  business  for  three  months  with  practically  no  income,  he 
must  have  one  quarter  of  his  tf>tal  annual  cost  of  operation  ;  namely,  $350,000. 
There  would  then  be  invested  $450,000,  with  an  annual  profit  of  about 
$100,000,  or  say  on  the  average  20  per  cent. 

•35 


136  CREDITS  AND  LOANS  [Cn.  vii 

2.  Credit.  Credit  consists  in  the  ability  to  secure  some  present 
benefit  under  an  ag^'eement  that  the  return  therefor  shall  be  post- 
poned to  some  future  day,  —  as  the  ability  to  borrow  money  or 
obtain  goods  or  services  to  be  paid  for  thereafter.  It  is  the  result 
of  the  favorable  opinion  of  the  mercantile  community  or  of  the 
particular  lender  or  seller  as  to  the  solvency,  honesty,  and  busi- 
ness capacity  of  the  borrower  '  or  buyer.  Commercial  agencies 
publish  periodical  estimates  of  the  ability  of  business  concerns  to 
meet  credit  obligations,  and  these  are  largely  used  by  those  who 
are  requested  to  extend  such  credit.  The  two  principal  agencies 
in  this  country  are  Bradstreet's  and  Dun's.  In  addition  to  these 
two  agencies  there  are  a  number  of  trade  agencies  which  specialize 
in  the  particular  trades  they  serve.  Every  business  man  needs 
credit,  and  his  rating  in  these  publications  is  of  great  importance 
to  him.  If  he  gives  false  information  in  order  to  secure  credit,  he 
may  be  liable  in  deceit  to  anyone  injured  thereby.  If  false  in- 
formation is  given  in  the  publications,  injurious  to  his  credit,  he 
njay  have  an  action  against  the  agency  for  damages.  Should  the 
agency  through  negligence  give  false  information  to  the  subscribers 
about  the  credit  of  a  person  rated,  and  if  one  of  the  subscribers, 
by  extending  credit  on  the  strength  thereof,  should  suffer  a  loss, 
the  agency  might  be  liable  to  the  subscriber. 

Good  credit  is  of  the  first  importance  to  a  business  man. 
Whether  he  wishes  to  borrow  money  or  to  purchase  goods  on 
deferred  payments,  he  must  have  the  reputation  of  possessing  the 
ability  and  inclination  to  meet  promptly  his  pecuniary  obligations. 
Often  he  must  give  security,  which  may  take  the  form  of  a  pledge 
of  things  of  value,  like  bonds,  or  of  a  mortgage  on  property,  or 
of  a  guaranty  by  some  third  person.  If  one  borrows  money  at  a 
bank,  he  may  be  required  to  have  his  note  indorsed  by  one  or 
more  persons,  who  are  known  as  accommodation  indorsers. 

Aside  from  the  credit  system  above  mentioned,  there  is  a  system  of  using 
credit  temporarily  in  place  of  money  for  present  payments.  This  is  by  issuing 
checks.  Including  these,  the  larger  part  of  the  business  of  the  country  is  done 
on  credit,  and  money  is,  after  all,  only  an  auxiliary  to  it.  Enormous  trans- 
actions take  place  without  the  actual  transfer  of  a  dollar  in  cash.  Every  day 
the  New  York  clearing  house  meets  to  strike  the  balance  among  the  banks 
belonging  to  it.  If  bank  A  presents  checks  which  it  has  received  against  banks 
B,  C,  and  D  to  the  amount  of  $1,125,382,  and  if  all  the  banks  combined 


§81]  CAPITAL,  CREDIT,  AND  MONEY  137 

present  checks  which  they  have  received  against  bank  A  to  the  amount 
of  $1,315,460,  then  bank  A  owes  the  clearing  house  $190,078.  If  bank  B 
presents  checks  against  banks  A,  C,  and  D  to  the  amount  of  $1,847,625, 
and  they  present  checks  against  it  to  the  amount  of  $1,620,347,  then  the 
clearing  house  owes  bank  B  $227,278.  In  this  way  the  balances  are  struck 
and  the  clearing  house  receives  the  cash  from  the  debtor  banks  and  pays  it 
out  to  the  creditor  banks,  being  at  the  close  of  the  transaction  not  a  penny 
richer  or  poorer.  But  while  there  is  an  average  of  about  $200,000,000  of 
checks  thus  passed  through  the  clearing  house  daily,  only  about  5  per  cent 
of  cash  balances  is  paid  in  and  paid  out.  Thus  95  per  cent  of  the  business  is 
done  by  a  system  of  check  credits. 

Even  banks  themselves  sometimes  need  credit  in  order  to  meet  their  obli- 
gations. Upon  depositing  with  the  clearing  house  its  bills  receivable  or  other 
securities,  a  bank  may  obtain  clearing-house  certificates  to  75  per  cent  of  the  par 
value  of  the  securities,  and  these  certificates  will  be  received  by  the  clearing  house 
in  payment  of  balances.  In  times  of  panic  these  clearing-house  certificates  may 
enable  a  bank  to  avoid  a  suspension  of  payments.   The  certificate  simply  states 

that Bank  has  deposited  securities,  and  the  certificates,  each  for  $5000, 

based  thereon  will  be  received  in  payment  for  balances  at  the  clearing  house. 

3.  Money.  Money  has  two  meanings.  In  the  general  sense 
it  means  whatever  has  currency  as  money  in  payment  of  debts ; 
this  is  called  currency  or  current  funds.  In  a  more  restricted 
sense  it  means  whatever  is  legal  tender  in  the  payment  of  debts, 
that  is,  money  which  a  creditor  must  receive ;  this  is  called 
legal-tender  money. 

There  are  eleven  different  kinds  of  current  money  in  circulation 
in  the  United  States. 

1.  Gold  coin,  now  coined  in  denominations  of  $2.50,  $5,  $10,  and  $20, 
called  respectively  quarter  eagles,  half  eagles,  eagles,  and  double  eagles.  An 
eagle  weighs  258  grains,  of  which  ^',5  is  gold  and  j'^  alloy.  The  others  weigh 
proportionally.    These  coins  arc  full  legal-tender  money  to  any  amount. 

2.  Standard  silver  dollars.  A  silver  dollar  weighs  412^  grains,  of  which  ,"5 
is  silver  and  -^^  alloy.  These  are  full  legal  tender  to  any  amount,  unless 
otherwise  expressly  stipulated  in  the  contract. 

3.  Subsidiary  silver,  namely,  half  dollars  (192.9  grains),  quarter  dollars 
(96.45  grains),  and  dimes  (38.58  grains),  all  /j-  silver  and  j'^  alloy.  These  are 
legal  tender  for  amounts  not  exceeding  $10  in  any  one  payment. 

4.  Nickel  coin,  namely,  the  five-cent  piece,  weighing  77.16  grains,  of  which 
,Y(y  's  copper  and  jYV  nickel.  This  is  legal  tender  for  amounts  not  exceeding 
25  cents  in  any  one  payment. 

5.  Bronze  coin,  namely,  the  one-cent  piece,  weighing  48  grains,  of  which 
^Yj  is  copper  and  ^\^  tin  and  zinc.  This  is  legal  lender  fur  amounts  not 
exceeding  25  cents  in  any  one  |)ayment. 


138  CREDITS  AND  LOANS  [Ch.  VII 

6.  Ihiitcd  States  notes  ("  greenbacks  '").  These  are  full  legal  tender  except 
for  duties  on  imports  and  interest  on  the  public  debt. 

7.  Treasury  notes  of  Act  of  1890.  These  are  full  legal  tender  except  when 
otherwise  expressly  stipulated  in  the  contract. 

8.  Gold  certificates,  issued  against  gold  and  bullion  deposited  in  the 
United  States  Treasury.  These  are  not  legal  tender,  but  are  receivable  for 
all  public  dues. 

9.  Silver  certificates,  issued  against  silver  dollars  deposited  in  the  Treasury. 
These  have  practically  taken  the  place  of  the  silver  dollars  for  general  circu- 
lation.   They  are  not  legal  tender,  but  are  receivable  for  public  dues. 

10.  National  bank  notes,  issued  by  national  banks  against  United  States 
bonds  deposited  in  the  United  States  Treasury.  These  are  not  legal  tender, 
but  are  receivable  for  all  public  dues  except  duties  on  imports,  and  one 
national  bank  is  bound  to  receive  the  notes  of  other  national  banks. 

11.  Federal  reserve  bank  notes,  issued  against  commercial  paper,  against 
which  there  is  required  a  40  per  cent  gold  reserve.  These  notes  are  obligations 
of  the  United  States  and  arc  receivable  by  all  national  and  member  banks  and 
federal  reserve  banks  and  for  all  taxes,  customs,  and  other  public  dues. 

Of  course,  gold  certificates  and  silver  certificates  do  not  increase  the  volume 
of  money.  They  simply  represent  so  much  coined  money  (or  gold  bullion), 
which  is  held  for  their  redemption,  and  they  circulate  instead  of  the  less 
convenient  coin.    They  are  a  kind  of  warehouse  receipt  for  money. 

4.  Exchange.  Exchange  is  an  operation  by  which  debts  may 
be  paid  at  distant  points,  through  a  transfer  of  credits ;  it  always 
requires  three  parties  and  two  payments.  A  claim  or  credit  which 
one  living  in  New  York  has  against  a  debtor  in  London  may  be  used 
to  pay  a  debt  one  owes  in  London,  or  it  may  be  sold  to  another 
debtor  in  New  York  and  used  by  him  to  pay  his  creditor  in 
London.  A  bank  in  New  York  may  keep  a  credit  with  a  bank 
in  London,  and  so  be  able  to  sell  to  New  York  debtors  its  checks 
on  the  London  bank,  with  which  the  New  York  debtors  may  pay 
their  London  creditors.  It  is  of  course  far  cheaper  and  safer  to 
send  to  London  an  order  on  a  London  merchant  or  a  London 
bank  than  to  send  gold  coin. 

Example.  B  in  New  York  sells  to  C  in  London  cotton  to  the  amount  of 
_^6oo,  and  draws  a  bill  of  exchange  (order  for  money)  on  C  payable  to  B's 
order  sixty  days  after  sight  for  that  amount,  {a)  B  may  sell  this  bill  to  a 
banker  or  bill  broker  in  New  York.  If  D  in  New  York  owes  E  in  London 
;^6oo,  D  may  buy  this  bill  of  the  broker  and  send  it  to  E,  who  presents 
it  in  London  to  C  and  gets  his  money,  (b)  B  may  discount  the  bill  at  his 
bank  in  New  York.  The  bank  may  send  it  and  other  like  bills  to  its  corre- 
spondent bank  in  London  and  thus  get  a  credit  there.    D  may  purchase  of 


§  8i]  EXCHANGE  1 39 

the  New  York  bank  its  bill  of  exchange  on  the  London  bank  and  send  this  to 
E,  who  presents  it  at  the  London  bank  and  gets  his  money. 

Domestic  exchange  is  that  between  different  parts  of  the  same 
country.  It  is  sold  by  banks,  express  companies,  telegraph  com- 
panies, and  even  by  the  government  in  the  form  of  post-office 
money  orders. 

Foreign  exchange  is  between  a  city  in  one  country  and  a  city 
in  another  countr)\  It  is  of  two  kinds  :  {a)  bankers'  bills,  that 
is,  bills  of  exchange  or  checks  drawn  by  one  bank  on  another ; 
{b)  commercial  bills,  that  is,  bills  of  exchange  drawn  by  one  mer- 
chant (creditor)  upon  another  merchant  (debtor).  The  latter  may 
be  drawn  against  a  shipment  of  goods  and  be  accompanied  by 
the  bill  of  lading,  in  which  case  they  are  called  "documentary"  ; 
or  they  may  be  without  accompanying  documents  of  title,  in  which 
case  they  are  called  "clean  bills." 

Foreign  exchange  is  reckoned,  but  is  not  always  expressed,  in 
the  money  of  the  country  on  which  the  bill  is  drawn.  The  rate 
of  exchange  is  the  expression  of  the  value  of  the  money  of  one 
country,  recorded  in  the  terms  of  the  money  of  another  country. 
In  this  country  the  rate  is  usually  expressed  in  the  terms  of  our 
money,  with  the  exception  of  the  French  rate.  Thus,  the  rate 
for  English  exchange  is  $4.8666  (for  a  pound  sterling)  ;  for  Ger- 
man, $.95  (for  four  marks)  ;  for  Dutch,  $.40  (for  a  guilder).  But 
the  French  rate  is  expressed  in  the  terms  of  French  money,  as, 
for  example,  5.15,  meaning  that  this  number  of  francs  will  be 
exchanged  for  one  dollar.^  There  may  be,  however,  a  slight  pre- 
mium or  a  slight  discount  equal  approximately  to  the  actual  cost 
of  shipping  gold,  which  is  about  |  of  i  per  cent  on  the  amount 
shipped.  As  this  is  scarcely  2  cents  on  $4.8666,  the  premium  or 
discount  will  rarely  be  more  than  2^  cents. 

To  the  natural  rate  fixed  by  the  par  of  exchange,  with  pre- 
mium or  discount,  is  added  the  commercial  rate,  depending  on 
the  abundance  or  scarcity  of  commercial  bills  and  the  price  fixed 
for  accommodating  a  person  in  New  York  with  a  bill  of  exchange 
on  London  or  any  other  foreign  city. 

'  The  United  States  Treasury  will,  on  application,  send  an  official  tai)lc  of 
values  of  foreign  coins. 


140  CRF.niTS  AND  LOANS  [Ch.  VII 

5.  Pavmcnt.  Payment  is  the  discharge  of  a  debt  in  money  or 
its  equivalent.  It  is  the  duty  of  the  debtor  to  seek  out  his  creditor 
and  tender  payment  at  the  proper  time.  It  is  not  the  duty  of  the 
creditor  to  give  a  receipt  unless  the  statute  so  provides,  but  it  is 
customary  to  do  so.  The  tender,  to  be  legally  and  technically  cor- 
rect, must  be  of  the  exact  amount  in  legal-tender  money.  If  the 
creditor  refuses  a  lawful  tender,  his  refusal  has  the  effect  of  stop- 
ping interest  upon  the  debt,  and,  if  the  tender  be  kept  good,  of 
preventing  costs  in  case  he  resorts  to  legal  process  to  collect 
the  debt. 

If  the  debtor  owes  the  creditor  different  debts,  he  may  direct 
that  a  payment  be  applied  toward  the  extinguishment  of  any  one 
of  them  he  may  select.  If  the  debtor  makes  no  application,  the 
law  will  apply  the  payment  in  the  manner  deemed  most  equitable 
and  just  to  both  parties. 

A  receipt,  when  given,  is  strong  but  not  conclusive  evidence 
that  the  sum  named  in  it  has  been  paid.  It  may  be  impeached 
for  mistake  or  fraud. 

As  stated  above,  the  larger  part  of  the  payments  in  the  com- 
mercial world  are  now  made  by  the  use  of  checks  or  bills  of 
exchange,  while  money,  save  in  the  case  of  small  transactions, 
is  used  mainly  to  settle  balances  at  the  clearing  house  or  between 
foreign  cities. 

82.  Interest  and  usury.  Interest  is  the  compensation  allowed 
by  law  or  fixed  by  the  parties  for  the  use  or  forbearance  or 
detention  of  money. 

Legal  interest  is  the  rate  of  interest  allowed  by  law.  Parties 
may  agree  for  less  than  this,  but  not  for  more  unless  a  higher 
rate  by  special  agreement  is  permitted  by  statute.  If  they  agree 
for  interest  with  no  rate  specified,  the  legal  rate  will  be  under- 
stood. In  many  states  a  legal  rate  is  fixed  for  cases  where  there 
is  no  specific  agreement,  and  a  maximum  rate  for  cases  where 
there  is  an  agreement.  These  statutes  often  provide  that  an  agree- 
ment for  a  rate  higher  than  the  legal  rate  but  within  the  maximum 
rate  shall  be  in  writing.^ 

Usury  is  unlawful  interest ;  that  is,  an  agreement  for  interest 
greater  than  that  allowed  by  law.    Such  a  contract  is  illegal,  but 

1  See  Interest  Table  at  end  of  this  chapter. 


§82]  INTEREST  AND  USURY  141 

the  effect  of  such  illegahty  varies  in  different  jurisdictions.  In 
some  the  lender  cannot  recover  any  interest  at  all ;  in  some  he 
can  recover  neither  principal  nor  interest ;  in  some  he  forfeits 
only  an  excess  above  the  specified  rate. 

In  England,  Massachusetts,  and  some  other  jurisdictions  no 
maximum  rate  of  interest  is  specified  by  statute,  and  parties  may 
contract  freely  concerning  the  rate,  except  that  an  unconscion- 
able rate  might  be  evidence  of  oppression  or  undue  influence. 
In  most  American  states  the  rate  is  fixed  by  statute,  ranging 
from  6  per  cent  to  12  per  cent,  and  any  agreement  for  interest 
above  that  rate  would  be  usurious  and  illegal ;  but  some  of  these 
states  allow  corporations  to  contract  to  pay  any  rate  of  interest 
agreed  upon,  and  some  allow  banks  to  make  large  call  loans  upon 
negotiable  security  at  any  rate  agreed  upon.  The  object  of  fixing 
the  maximum  rate  is  to  avoid  oppression  of  borrowers,  and  it 
is  thought  that  corporations  and  dealers  upon  stock  exchanges 
(who  secure  call  loans)  are  not  likely  to  be  subject  to  such  oppres- 
sion and  should  be  left  free  to  contract  for  any  rate  they  may 
think  the  loan  worth  to  them.  Special  rates,  higher  than  ordinary 
rates,  are  also  usually  allowed  to  be  charged  by  pawnbrokers. 

Up  to  the  time  a  debt  becomes  due  and  payable  there  is  no 
interest  allowed  upon  it  unless  the  parties  have  provided  for 
interest. 

A  sale  of  goods  for  S500  upon  sixty  days'  credit  would  carry  no  interest 
during  the  sixty  days  unless  it  was  provided  that  the  credit  should  be  "  with 
interest."  So  a  negotiable  promissory  note  carries  no  interest  until  maturity 
unless  interest  is  specified  in  the  note.  All  debts  bear  interest  after  they  are 
due  and  payable,  such  interest  being  regarded  as  a  measure  of  damages  for  the 
wrongful  detention  of  the  money. 

Compound  interest  is  not  favored  in  the  law  and  will  be 
allowed  only  when  the  interest  due  has  by  some  new  agreement 
been  incorporated  with  the  principal  or  where  expressly  contracted 
for  in  the  original  agreement. 

Example.  V>  agrees  to  pay  C  5 1000  three  years  from  date,  with  interest  at 
6  per  cent  per  annum,  payable  annually.  B  pays  no  interest  and  the  three  years 
have  ciapscfl.  C  may  recover  the  principal  with  simple  interest ;  namely,  ?i  180 
(plus  also  interest  from  maturity  to  the  date  of  the  judgment).  After  judgment 
C  is  allowed  interest  on  the  total  judgment  debt  at  the  legal  rate. 


14:!  CRKOrrS  AND  LOANS  [Cii.  VII 

83.  Banks.  Banks  arc  financial  institutions  which  receive  money 
on  deposit,  loan  money,  sometimes  issue  money,  deal  in  commer- 
cial paper,  and  facilitate  exchange.  Commercial  banking  consists 
essentially  of  the  exchange  of  (^?)  credit  for  money  and  {b)  credit 
for  credit.  A  customer  delivers  his  money  to  the  bank  and  re- 
ceives in  exchange  the  bank's  credit.  The  legal  title  to  the  money 
is  in  the  bank.  The  depositor  has  a  right  to  demand  back  an 
equivalent  sum,  but  not  the  specific  money  deposited.  He  has 
received  the  bank's  credit  for  his  cash.  If  a  customer  discounts 
his  note  or  bills  receivable  at  a  bank,  he  is  exchanging  his  credit, 
payable  at  some  future  time,  for  the  bank's  credit,  payable  on 
demand.    There  are  several  kinds  of  banks  in  this  country. 

National  banks  are  chartered  by  the  United  States  government 
with  power  to  issue  national  bank  notes  upon  depositing  as  security 
therefor  United  States  bonds.  They  are  banks  of  deposit,  dis- 
count, and  loans,  doing  a  general  banking  business.  They  may 
charge  the  rate  of  interest  which  the  state  where  they  are  located 
has  fixed  for  its  own  state  banks.  The  penalty  for  usury  is  the 
recovery  by  the  borrower  of  twice  the  amount  of  interest  paid. 
National  banks  may  be  organized  by  not  less  than  five  persons. 
In  any  place  having  less  than  3000  inhabitants  they  must  have  a 
capital  stock  of  not  less  than  $25,000  ;  in  a  place  of  from  3000  to 
6000,  not  less  than  $50,000 ;  in  a  place  of  from  6000  to  50,000, 
not  less  than  $100,000  ;  in  a -place  of  over  50,000,  not  less  than 
$200,000.  On  September  2,  191 5,  there  were  7613  national 
banks,  with  an  aggregate  capital  of  $1,068,863,507.70.  On  the 
same  date  the  outstanding  national  bank  notes  amounted  to 
$718,496,591.50. 

State  banks  are  chartered  by  the  state  in  which  they  are  located, 
and,  like  national  banks,  are  usually  banks  of  deposit,  discount, 
and  loans.  Owing  to  a  national  tax  of  10  per  cent  on  all  bank 
notes  issued  by  state  banks,  none  of  them  can  profitably  issue 
such  notes. 

Trust  companies  are  chartered  by  states  and  are  given  many 
of  the  powers  of  banks  of  deposit,  and  are  also  authorized  to  act 
as  fiscal  agents,  trustees,  executors,  administrators,  etc.  When  a 
corporation  wishes  to  issue  bonds  secured  by  mortgage,  it  usually 
selects  a  trust  company  as  trustee   for  the  bondholders.    They 


§S3]  BANKS  143 

often  serve  as  agents  or  trustees  in  the  organization  or  reorganiza- 
tion of  corporations.  Trust  companies  have  increased  greatly  dur- 
ing the  past  few  years,  and  now  in  New  York  City  outnumber 
the  national  banks.  Their  powers  are  so  large  as  compared  with 
national  or  state  banks  that  capitalists  find  it  more  profitable  to 
invest  in  them  than  in  the  older  and  more  conservative  institutions. 
They  are  also  much  less  restricted  as  to  investments  and  security 
for  loans. 

Savings  banks  are,  as  the  name  implies,  depositories  for 
savings  and  not  ordinar)'  banks  of  deposit  for  live  accounts. 
They  pay  interest  on  deposits  and  loan  money  on  mortgages  or 
other  permitted  securities  at  a  higher  rate.  They  are  organized 
under  state  laws. 

Private  bankers  are  persons  who  carry  on  a  banking  business 
without  forming  a  corporation.  They  may  unite  with  banking 
proper  a  variety  of  other  enterprises,  and  some  of  the  largest 
financial  operations  are  conducted  through  private  bankers  who 
promote  or  finance  them.  They  often  combine  with  a  banking 
business  that  of  stock  or  bond  brokers. 

By  act  of  December  23,  191 3,  the  federal  reserve  banking 
system  was  established.  This  act  provides  for  the  creation  of 
not  less  than  eight  nor  more  than  twelve  federal  reserve  dis- 
tricts, in  each  of  which  there  shall  be  located  a  federal  resen^e 
bank.  All  national  banks  within  the  district  arc  required  to,  and 
other  banks  may,  become  members  of  the  federal  reserve  bank. 
r^ach  federal  reserve  bank  is  rccjuircd  to  have  a  capital  of  at 
least  $4,000,000,  which  is  subscribed  by  the  member  banks. 
ICach  federal  reser\^e  bank  is  entitled  to  rediscount  paper  of  the 
member  banks  and  thus  to  relieve  such  banks  in  time  of  finan- 
cial strain  ;  to  receive  deposits  from  any  of  its  member  banks  or 
from  the  United  States  ;  and  to  issue  federal  reserve  bank  notes 
to  the  member  banks  in  exchange  for  commercial  paper.  The 
federal  rcserv^c  system  has  as  two  of  its  primary  objects  the 
creation  of  a  more  elastic  currency  and  tlic  cslahlislinu'iit  of  a 
more  effective  supervision  of  banking. 

If  a  bank  receives  deposits  subject  tf)  check,  it  usually  allows 
no  interest ;  but  .savings  hanks,  trust  cfunpanies,  and  .sometimes 
private  bankers  receive  deposits  not  sui)ject  to  check  and  allow 


144  CKKDirs   . WD   LOANS  [Cii.  VII 

interest,  while  national  banks  and  state  banks  generally  do 
not.  A  bank  of  deposit  makes  its  profits  on  loans.  Even  if  it 
pays  interest,  it  loans  at  a  higher  rate  than  it  pays.  Loans  of 
banks  of  dejjosit  are  made  on  indorsed  commercial  paper  or  on 
collateral  security.  National  banks  are  forbidden  to  loan  on 
real-estate  secijrity,  but  savings  banks  and  trust  companies 
loan    on    such    security. 

84.  Bank  deposits.  When  money  is  deposited  in  a  bank,  the 
depositor  becomes  the  creditor  of  the  bank  to  tlic  amount  of 
his  deposit.  In  ordinary  banks  of  deposit  there  is  an  implied 
understanding  that  the  depositor  may  draw  checks  upon  his 
deposits  in  favor  of  third  persons,  and  that  the  bank  will  honor 
them.  There  is  no  such  understanding  in  the  case  of  ordinary 
debtors,  and  the  debtor  is  not  bound  to  honor  any  order  upon 
him  unless  it  be  for  the  full  amount  of  his  debt.  In  savings 
banks  and  in  the  case  of  interest-bearing  deposits  in  other 
banks  it  is  usually  provided  that  some  notice  shall  be  given  of 
an  intention  to  withdraw  any  portion  of  the  deposit,  and  that 
the  deposit  book  shall  be  presented  with  the  check  or  order. 
Ordinary  deposits  do  not  bear  interest. 

When  money  is  deposited  in  a  bank  subject  to  check,  the 
depositor  usually  receives  a  bank  book  in  which  each  deposit 
is  entered.  This  constitutes  the  evidence  of  his  credits.  When 
a  check  is  paid,  the  bank  keeps  it  and  this  constitutes  the  evi- 
dence of  its  credits  as  against  its  depositor.  The  book  and 
vouchers  (paid  checks)  are  then  returned  to  the  depositor,  who 
should  at  once  examine  each  check  in  order  to  ascertain  that 
it  is  genuine,  and  should  verify  the  account.  If  a  forged  or 
raised  check  has  been  paid,  the  loss  falls  upon  the  bank  as 
between  the  bank  and  the  depositor,  but  unreasonable  delay 
in  examining  the  checks  after  they  are  returned  to  him,  or  in 
notifying  the  bank  of  any  irregularity,  may  estop  the  depositor 
from  asserting  his  rights  in  this  respect. 

A  depositor  may  have  a  note  made  by  him  payable  at  his 
bank.  In  that  case,  when  the  note  falls  due  it  is  equivalent  to 
an  order  upon  the  bank  to  pay  it,  and  it  is  paid  like  a  check 
and  the  note  is  included  as  a  voucher  when  the  account  is 
written   up.    A   depositor   may,    however,    direct  a   bank   not   to 


§85]  LOANS  AND  DISCOUNT  145 

pay  from  his  deposit  a  note  or  check  which  he  has  made  pay- 
able there.  In  this  event  the  bank  is  bound  to  refuse  payment 
unless  it  is  itself  the  owner  of  the  note,  in  which  case,  as  credi- 
tor to  that  amount,  it  may  offset  the  note  against  what  it  owes 
to  the  depositor. 

Where  one  does  not  wish  to  draw  checks  against  a  deposit, 
he  may  take  a  "certificate  of  deposit"  from  the  bank.  This 
is  in  the  form  of  a  receipt  stating  that  "  A.  B.  has  deposited  in 
this  bank  five  hundred  dollars  payable  to  his  order  upon  return  of 
his  certificate,"  and  is  signed  by  the  cashier.  If  certificates  are 
for  a  definite  period,  as  three  months,  they  are  often  made  with 
interest.    They  are  practically  the  promissory  note  of  the  bank. 

85.  Loans  and  discount ;  security.  If  one  wishes  to  borrow 
money  for  temporary  use  in  his  business,  he  usually  applies  at 
his  bank  for  a  loan.  Assuming  that  he  wishes  to  borrow  $1000, 
he  would  make  his  promissory  note  for  that  amount  (with  or 
without  security),  payable  at  a  specified  time  after  date,  and  the 
bank  would  discount  it  and  place  the  amount,  less  the  discount, 
to  his  credit. 

Discount  is  the  price  paid  for  the  present  use  of  money  or 
credit  in  change  for  the  promise  of  future  payment.  In  other 
words,  it  is  the  taking  of  interest  in  advance  upon  a  loan  ;  it  is 
incidental  to  banking,  and  bank  discount  is  not  usury,  although 
the  lender  may  thereby  secure  slightly  more  than  the  legal  rate. 
It  is  technically  discounting  one's  own  commercial  paper  in  order 
to  raise  money. 

Discount  is  also  used  in  the  sense  of  purchasing  for  their  present 
worth,  or  for  less,  notes  made  by  one  person  and  owned  by  another. 

Examples.  IJ  wishes  to  raise  money.  He  owns  a  note  made  by  C ;  he 
sells  this  note  to  D.  If  he  sells  it  for  its  present  worth,  there  could  be  no 
question  in  any  event  of  the  validity  of  the  transaction.  But  if  he  sells  it 
for  less  than  its  present  worth,  the  buyer  will  make  a  profit  greater  than  the 
legal  rate  of  interest.  This,  however,  is  not  essentially  usurious,  any  more 
than  to  buy  a  horse  and  make  a  profit  upon  it.  If  B  docs  not  indorse  the 
note  so  as  to  become  liable  upon  it  himself,  the  sale  may  be  for  any  price 
agreed  upon.  If  B  does  indorse  it,  most  courts  still  hold  that  the  sak-  (if 
not  a  mere  cover  for  usury)  may  be  for  any  price  agreed  upon,  although 
some  courts  hf)!d  this  to  be  usurious  if  the  buyer  makes  thereby  more  than 
the  legal  rate  of  interest. 


146 


CRKDrrs   AM)   LOANS 


[Ch.  VII 


Interest  Tahlk 

The  following  Lible  shows  the  ordinary  legal  rate  of  interest  and  the 
maximum  rate  by  special  agreement  in  each  state  and  territory.  Tlie  special 
agreement  must  in  most  states  be  in  writing. 


State,  etc. 

Lhc-.al 
Rate 

Maximum 
Rate 

State,  etc. 

LnoAL 
Rate 

Maximum 
Rati; 

Alabama 

s 

S 

Montana    .... 

8 

12 

Alaska      .     .     . 

s 

12 

Nebraska  .     . 

7 

10 

Arizona    .     . 

6 

10 

Nevada       .     . 

7 

12 

Arkansas      .     . 

6 

10 

New  Hampshire 

() 

6 

California     .     . 

7 

Any  rate 

New  Jersey    . 

r. 

6 

Colorado .     .     . 

S 

Any  rate 

New  Mexico  . 

6 

12 

Connecticut 

6 

12 

New  York 

G 

6 

Delaware      .     . 

G 

6 

North  Carolina 

6 

6 

District  of  Colum 

jia 

6 

10 

North  Dakota 

G 

10 

Florida     .     . 

S 

10 

Ohio      .     .     . 

6 

8 

Georgia 

7 

8 

Oklahoma .     . 

6 

10 

Hawaii 

S 

12 

Oregon 

6 

10 

Idaho  . 

7 

12 

Pennsylvania 

6 

6 

Illinois 

5 

7 

Rhode  Island 

6 

.■\ny  rate 

Indiana 

6 

8 

South  Carolina 

7 

8 

Iowa    . 

6 

8 

South  Dakota 

7 

12 

Kansas 

6 

10 

Tennessee 

6 

6 

Kentucky      .     . 

6 

6 

Texas    .     .     . 

6 

10 

Louisiana      .     . 

5 

8 

Utah      .     .     . 

8 

12 

Maine  .... 

G 

Any  rate 

Vermont    .     . 

6 

6 

Maryland      .     . 

6 

6 

Virginia 

6 

6 

Massachusetts  . 

6 

Any  rate 

Washington    . 

6 

12 

Michigan       .     . 

5 

7 

West  Virgini:i 

6 

6 

Minnesota     .     . 

6 

ID 

Wisconsin 

6 

10 

Mississippi    . 

6 

8 

Wyoming  .     . 

8 

12 

Missouri  .     .     . 

6 

8 

In  no  case  may  a  bank  discount  or  purchase  notes  at  a  greater  discount 
than  the  legal  rate  of  interest.  This  limitation  upon  banks  has  created  a 
class  of  dealers  known  as  bill  brokers,  or  popularly  as  "  note  shavers,"  who  pur- 
chase such  instruments  at  an  agreed  price  for  themselves  or  for  other  persons. 

If  in  borrowing  money  one  lias  to  give  security,  this  may  be 
done  by  getting  another  person  to  indorse  or  guaranty  his  note, 
or  by  depositing  collateral  in  the  form  of  a  pledge,  or  by  giving 
a  mortgage  upon  property.    When   there   is  an   accommodation 


§85]  REVIEW  QUESTIONS  AND  PROBLEMS  147 

indorser,  the  note  is  usually  made  payable  to  him,  indorsed  by 
him,  and  discounted  at  the  bank  by  the  accommodated  party.  If 
it  is  not  paid  by  the  maker  when  it  is  due,  the  indorser  is  noti- 
fied and  he  is  then  liable  to  pay  it.  If  the  note  is  guarantied, 
it  is  made  payable  to  the  bank,  and  the  guaranty  is  written 
upon  the  back  and  signed  by  the  guarantor.  Upon  nonpayment 
by  the  maker,  the  guarantor  is  liable  without  notice.  Pledge 
of  collateral  security  has  already  been  treated  (see  sect.  65  ante). 
A  mortgage  is  in  form  a  conveyance  of  property  upon  condition 
that  if  a  specified  sum  be  paid  to  the  mortgagee  at  a  specified 
date,  the  mortgage  shall  be  void  and  of  no  further  effect. 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  81.  What  is  capital?  What  is  working  capital  ?  What  is  credit? 
How  is  it  estimated  ?  How  are  checks  used  for  credit  purposes  ?  Explain  the" 
methods  of  a  clearing  house.  What  is  a  clearing-house  certificate?  What  is 
money  ?  What  is  currency  ?  What  is  legal  tender  ?  State  the  kinds  of  United 
States  money.  Which  are  legal  tender  and  to  what  amount?  What  is  ex- 
change? What  two  kinds  of  foreign  exchange?  What  sends  foreign  exchange 
above  par  or  below  par  ?  What  is  the  natural  limit  of  such  fluctuation  ?  What 
determines  the  commercial  price  of  exchange?  What  is  payment?  What  is 
the  effect  of  refusing  it  ?  How  is  it  applied  if  there  are  different  debts  ?  Must 
the  creditor  give  a  receipt?   What  is  its  effect? 

Problem  i.  B  owes  C  $32.  B  tenders  C  silver  in  payment  as  follows: 
15  silver  dollars,  20  half  dollars,  25  quarter  dollars,  7  dimes,  i  nickel.  C  re- 
fuses to  accept  this,  alleging  it  is  not  legal  tender.  C  then  sues  B,  and  to  avoid 
costs  and  interest  B  pleads  the  prior  tender.    Result  ? 

Problem  2.  B  owes  C  a  debt  of  $25  contracted  in  1898,  and  one  of  $36 
contracted  in  1901.  B  in  1903  pays  C  $25  and  directs  C  to  credit  it  on  the 
debt  of  S36.  C  credits  it  on  the  debt  of  S25.  In  1905,  after  the  debt  of  $25 
is  outlawed,  C  sues  B  for  $36.  B  pleads  payment  of  $25.  How  much  may 
C  recover? 

Problem  j.  In  the  above  case  B  makes  no  request  as  to  application  of 
payment.    How  will  it  be  applied? 

82.  What  is  interest?  What  is  usury?  What  is  the  effect  of  usury  upon  a 
contract  ?  What  is  the  legal  rate  and  the  maximum  rate  of  interest  in  your  sUitc? 
What  debts  carry  interest?  What  is  compound  interest?  When  is  it  allowed? 

Problem  4.  B  bought  goods  of  C  to  the  amount  of  $21  5  on  three  months' 
credit,  which  expired  July  7.  On  .September  3,  C  brought  .suit  in  New  York 
against  B  for  this  debt.    On  November  10  a  judgment  was  entered  for  C. 


148  CRKDirS  AND  LOANS  [Ch.  VII 

On  January  15  this  judgment  was  paid,  (a)  Assuming  that  the  disbursements 
and  costs  allowed  C  by  the  court  amounted  to  ^^24. 25,  how  much  should  the 
judgment  be  entered  for?  {/>)  Mow  much  would  be  paid  to  discharge  it  on 
January   15? 

Problem  j.  B  borrows  of  C  in  New  York  ji^ioo  for  one  year,  and  gives  his 
promissory  note  for  that  amount  with  6  per  cent  interest.  In  addition  B  pays 
C  a  bonus  of  $5  ;  that  is,  C  really  pays  over  to  B  on  the  loan  only  $95.  C 
sues  B  on  this  note.    B  pleads  usury.    Result? 

Pwbh-tn  6.    In  the  above  case  B  is  a  corporation.    Result? 

83.  What  is  a  bank?  Name  and  describe  the  different  kinds  of  banks. 
How  much  capital  must  a  national  bank  have  in  your  city  or  village?  Is  there 
a  state  bank  there?  a  savings  bank?  a  trust  company?  a  private  banker? 
What  advantages  have  trust  companies  over  state  or  national  banks?  What 
is  the  federal  reserve  system  ?  What  are  live  .accounts  ?  What  banks  take 
deposits  and  allow  interest  ? 

84.  What  is  the  relation  of  a  bank  to  a  depositor?    Who  loses  the  money 
•paid  by  a  bank  upon  a  forged  check?    If  one  has  a  note  due  and  payable  at  a 

bank,  explain  what  is  done  on  the  due  date.    What  is  a  certificate  of  deposit? 

85.  Explain  the  process  of  borrowing  money  at  a  bank.  What  is  discount? 
How  great  may  it  be?  What  is  purchasing  a  note?  For  what  price  may  a 
bank  purchase  a  note  made  by  X  and  owned  by  A  ?  For  what  price  may  an 
individual  purchase  it?  In  what  forms  may  one  give  security  for  a  loan? 
What  is  a  mortgage? 


CHAPTER  VIII 

THE  CONTRACT  OF  GUARANTY 

86.  Guaranty  defined.  A  guaranty^  is  a  promise  to  be  answer- 
able for  another's  debt,  default,  or  obligation.  It  is  a  contract 
collateral  to  the  main  contract  of  the  principal  party. 

Example.  B  purchases  goods  of  C  on  credit ;  D  gives  C  a  guaranty  that 
B  will  pay  for  them,  or,  in  case  B  does  not,  that  D  will. 

The  guarantor  is  he  who  gives  the  guaranty.  The  guarantee 
is  he  to  whom  the  guaranty  is  given ;  that  is,  the  creditor.  The 
principal  is  he  whose  debt  is  guarantied  ;  that  is,  the  debtor.  The 
word  "surety"  is  sometimes  used  interchangeably  for  "guarantor." 
But  strictly  a  surety  is  one  who  is  bound  with  the  principal  upon 
the  original  contract  and  in  the  same  terms,  while  a  guarantor 
is  bound  upon  a  collateral  contract  to  make  good  in  case  the 
principal  fails. 

"  We,  A.  B.  as  principal  and  C.  D.  as  surety,  hereby  agree,  etc."  would  be 
a  case  of  suretyship;  while  "  I,  A.  B.,  hereby  agree,  etc.,"  followed  by  the 
indorsement,  "  I  hereby  guaranty  ^  the  performance  or  payment  of  the  within 
contract.    C.  D.,"  would  be  a  case  of  guaranty. 

An  indorsement  of  a  negotiable  instrument  is  a  special  form  of  guaranty, 
the  indorser  promising  that  he  will  be  answerable  for  the  amount  of  the  note 
in  case  the  holder  makes  due  presentment  to  the  maker,  gives  due  notice  of 
dishonor  to  the  indorser,  and,  in  case  of  a  foreign  bill  of  exchange,  makes  due 
protest.    This  is  considered  under  the  head  of  Negotiable  Instruments. 

A  guaranty  of  payment  differs  from  a  guaranty  of  collection. 
In  the  first  case  the  guarantor  agrees  to  pay  if  the  principal  docs 
not;  in  the  second  he  agrees  to  pay  if  the  debt  cannot  be  collected 
of  the  principal. 

*  This  is  the  same  word  as  "warranty,"  having  preserved  the  Norman-French 
;f,  which  has  been  converted  into  the  English  w  in  "  warranty,"  as  the  French 
Guillaume  becomes  "  William  "  in  Knglish.  .\  warranty  is  a  guaranty  of  the  title  or 
quality  of  goods.  A  guaranty  is  a  warranty  of  credit,  solvency,  etc.  (see  Guaranty 
Insurance,  sect.  74  ante). 

2  The  verb  is  cither  "guaranty"  or  "guarantee."  .Sometimes  one,  sometimes 
the  other,  is  used.    The  noun  also  is  written  in  both  forms. 

1-19 


ISO  (UIARANTV  [Cm.  VIII 

A  continuing  guaranty  is  an  agreement  to  be  responsible  for 
moneys,  goods,  or  'services  to  be  furnished  the  principal  from 
time  to  time  in  the  future. 

87.  A  guaranty  must  be  in  writing.  Under  the  Statute  of 
Frauds  (see  sect.  22  afite)  a  promise  to  answer  for  the  debt,  de- 
fault, or  miscarriage  of  another  must  be  in  writing  and  signed  by 
the  party  to  be  charged.  Hence  a  guaranty  of  another's  debt  or 
promise  must  comply  with  this  provision. 

If  the  contract  is  strictly  one  of  indemnity,  namely,  a  promise 
to  save  another  harmless  from  the  results  of  some  transaction 
into  which  the  promisor  induces  him  to -enter,  it  is  to  be  distin- 
guished from  a  guaranty  and  need  not  be  in  writing.  In  such 
a  case  there  are  but  the  two  parties. 

Examples  .•  i .  B  promises  C,  an  officer,  that  if  the  latter  will  attach  D's  goods, 
he  will  guaranty  him  against  loss  or  damage.  This  is  an  indemnity  and  not  a 
guaranty,  and  need  not  be  in  writing.    There  are  really  but  two  parties  here. 

2.  Sometimes  it  is  very  difficult  to  say  whether  a  contract  is  one  of  guaranty 
or  of  indemnity.  B  promises  C  that  if  the  latter  will  go  upon  D's  bail  bond,  he 
(B)  will  make  good  any  loss  C  may  suffer.  In  England  and  in  many  American 
states  this  is  treated  as  a  contract  of  indemnity,  while  in  other  states  it  is 
treated  as  a  contract  of  guaranty. 

3.  Again,  the  promise  may  be  an  original  instead  of  a  collateral  one,  in 
which  case  it  is  not  a  guaranty  and  need  not  be  in  writing.  "  If  you  will  let 
B  have  these  goods,  I  will  pay  for  them."  The  promisor  is  primarily  and  not 
collaterally  liable.  Had  he  said.  "  I  will  pay  for  them  if  B  does  not,"  it  would 
have  been  a  guaranty. 

4.  Again,  the  promise  may  be  to  pay  the  debt  out  of  funds  put  into  the 
hands  of  the  promisor  for  that  purpose.  D  has  moneys  of  C  put  into  his 
hands  to  pay  for  goods  sold  to  C  by  B.  D  promises  B  to  pay.  This  is  not 
within  the  Statute  of  Frauds.    It  is  really  a  case  of  a  trust. 

In  all  doubtful  cases  it  is  safer  to  have  the  promise  put  into 
writing  and  signed.  In  some  states  it  is  necessary,  also,  that 
the  writing  should  express  the  consideration  upon  which  the 
guarantor's  promise  is  based. 

88.  Consideration.  When  the  contract  of  guaranty  is  made  at 
the  same  time  as  the  contract  which  it  guaranties,  the  considera- 
tion which  supports  the  principal's  promise  will  also  support  the 
guarantor's. 

When  the  contract  of  guaranty  is  made  .subsequent  to  the  main 
contract,  a  new  consideration  is  required  to  support  it. 


§§89,90]  NOTICE  OF  DEFAULT  151 

Examples:  i.  "If  you  let  B  have  these  goods,  I  will  guaranty  pay- 
ment for  them.  C.''  The  delivery  of  the  goods  supports  B's  promise  and 
also  C's. 

2.  B  owes  A  for  goods  already  sold  and  delivered.  C  writes  A,  "  I  will  guar- 
anty B's  debt  to  you."  There  must  be  some  new  consideration  for  this  or  the 
promise  will  be  unenforceable.  Such  a  consideration  might  be  that  A  should 
bind  himself  to  give  B  an  extended  time  in  which  to  pay. 

89.  Notice  of  acceptance  by  guarantee.  Whether  the  creditor 
(guarantee)  must  notify  the  guarantor  that  he  accepts  the  guar- 
anty has  been  a  very  much  discussed  question.  It  is  not  neces- 
sary, of  course,  in  the  case  of  a  contemporaneous  guaranty ;  that 
is,  a  guaranty  made  at  the  same  time  as  the  main  contract.  The 
difficulty  arises  in  a  case. of  a  guaranty  as  to  future  advances. 

Example.  C  writes  A,  "  I  will  guaranty  payment  of  all  goods  you  may  let 
B  have  during  the  next  year."  Must  A  notify  C  that  he  accepts  the  guaranty, 
or  will  the  delivery  of  goods  to  B  constitute  an  acceptance  ?  Generally  in  this 
country  it  is  held  that  notice  must  be  given  in  such  a  case,  because  the  guar- 
antor is  entitled  to  know  that  his  offer  of  guaranty  has  been  accepted.  In 
England  and  in  some  of  our  states  no  notice  is  necessary,  the  acceptance  con- 
sisting in  the  doing  of  the  act  specified ;  that  is,  letting  B  have  the  goods.  In 
view  of  this  conflict  it  would  always  be  safer  to  notify  the  guarantor  that  the 
guaranty  has  been  accepted. 

90.  Notice  to  guarantor  of  the  default  of  the  principal.  Whether 
the  guarantee  must  notify  the  guarantor  that  the  principal  has 
defaulted  in  the  payment  or  other  obligation  covered  by  the  guar- 
anty is  also  a  disputed  question.  Some  states  require  no  notice, 
while  others  require  notice  but  do  not  agree  as  to  the  cases  in 
which  it  must  be  given. 

In  states  requiring  notice  these  different  holdings  are  found  : 

1.  That  the  guarantor  is  always  discharged  for  want  of  such 
notice  if  he  is  damaged  thereby, 

2.  {a)  That  the  guarantor  is  discharged  for  want  of  such  notice 
if  the  amount  for  which  he  is  bound  is  an  indefinite  one  ;  but 
(/;)  that  he  is  not  discharged  for  want  of  notice  if  the  amount  for 
which  he  is  bound  is  definite. 

In  view  of  this  conflict  and  tlu-  nicety  of  the  distinctions,  it  is 
safer  for  the  creditor  to  notify  the  guarantor,  upon  default  of  the 
debtor,  of  the  fact  of  such  default  and  that  the  creditor  looks  to 
the  guarantor  for  payment. 


152  GUARANTY  [Cu.  VTIT 

There  is  also  much  conflict  as  to  the  conditions  under  which  the 
guarantee  is  bound  to  disclose  to  the  guarantor  at  the  time  of  mak- 
ing the  guaranty  any  fact  known  to  the  guarantee  concerning  the 
honesty,  fidelity,  or  solvency  of  the  j)rincipal.  In  some  cases  a 
guarantor  has  been  relieved  of  liability  because  the  guarantee  con- 
cealed such  knowledge,  but  the  cases  are  by  no  means  clear  as 
to  what  constitutes  fraudulent  concealment. 

Examples .-  i .  X  has  been  state  treasurer,  and,  known  to  the  state  officers 
who  are  required  to  take  and  approve  his  bond,  he  has  been  guilty  of  defalca- 
tion. They  take  a  bond  from  B  and  others  as  sureties  for  the  fidelity  of  the 
treasurer,  concealing  this  knowledge.  This  is  fraudulent  concealment  and  B 
and  the  other  sureties  are  not  liable.  The  same  result  would  be  reached  if  an 
employer,  knowing  of  the  dishonesty  of  his  clerk,  afterwards  took  a  fidelity 
bond  to  assure  his  honesty,  concealing  the  prior  dishonesty. 

2.  X  is  known  to  C  to  be  financially  weak  or  insolvent.  C  takes  an  obliga- 
tion from  X  with  B  as  guarantor,  concealing  this  fact.  B  is  not  relieved.  This 
is  not  fraudulent  concealment.  So  it  has  been  held  not  to  be  fraudulent  to  con- 
ceal the  fact  that  the  principal  has  been  gambling  or  is  already  indebted  to 
the  guarantee.  If,  however,  the  guarantor  asks  the  guarantee  about  such 
matters,  he  must  answer  fully  and  fairly  if  he  answers  at  all. 

91.  What  will  discharge  the  guarantor.  A  guarantor  may  be 
discharged  from  his  liability,  and  it  remains  to  consider  what  will 
operate  to  work  such  a  discharge. 

1.  Discharge  of  the  principal.  If  the  principal  is  voluntarily 
discharged  or  released,  the  guarantor  is  also  discharged,  unless  he 
consents  to  such  release.  But  he  is  not  discharged  by  an  involun- 
tary release,  as  a  release  in  bankruptcy  by  force  of  law. 

A  covenant  by  the  creditor  not  to  sue  the  debtor,  coupled  with 
a  reservation  of  the  rights  against  the  guarantor,  is  held  in  Eng- 
land and  in  some  of  our  states  not  to  discharge  the  guarantor ; 
and  an  agreement  for  release  with  such  reservation  is  construed 
to  be  a  covenant  not  to  sue.  But  this  exception  is  not  recognized 
in  some  of  our  states. 

Examples  :  \.  B  guaranties  X's  debt  to  C,  who  discharges  X  from  liability, 
giving  him  a  release  under  seal.    B  is  also  discharged. 

2.  In  the  above  example,  X  becomes  embarrassed  and  creditors  agree  to 
take  6o  cents  on  the  dollar  and  release  X.  C  receives  his  6o  per  cent.  X  is 
released.    So  is  B. 

3.  In  Example  i,  X  goes  into  bankruptcy  and  is  discharged  by  payment 
of  60  per  cent.  X  is  released  but  B  is  not.  C  may  recover  the  additional 
40  per  cent  from  B. 


§91]  DISCHARGE  OF  GUARANTOR  I53 

2.  Alteration  of  contract.  If  the  creditor  has  altered  the  terms 
of  the  contract  with  the  debtor  without  the  consent  of  the  guarantor, 
the  latter  is  discharged. 

Examples  :  4.  C  guaranties  payment  for  a  specified  engine,  to  be  sold  by 
B  to  A.  Afterwards  A  decides  to  take  a  different  engine  at  a  different  price. 
C  is  discharged. 

5.  C  guaranties  payment  of  a  note  from  B  to  A,  due  on  September  1 1 . 
B  and  A  by  mutual  consent  change  the  note  to  read  October  11.  C  is  dis- 
charged. His  contract  is  destroyed  by  an  alteration  made  without  his  consent. 
It  would  be  the  same  if  the  date  were  changed  to  August  11. 

3.  Extension  of  time  to  debtor.  If  the  creditor  definitely  ex- 
tends the  time  of  payment  to  the  debtor  without  the  consent  of 
the  guarantor,  the  latter  is  discharged. 

Exatnple  6.  C  has  guarantied  to  B  the  payment  of  a  debt  due  from  A  on 
April  I .  B,  in  consideration  that  A  will  give  him  a  note,  extends  the  time  to 
June  I.    C  is  discharged. 

7  {Exception).  There  is  an  exception  to  this  rule  in  the  case  where  the 
creditor,  while  extending  the  time  to  the  debtor,  expressly  reserves  his  right 
against  the  guarantor.  This  is  because  the  rights  of  the  guarantor  against  his 
principal  are  not  impaired,  since  the  latter  impliedly  agrees  that  the  guarantor 
may  at  once  pay  the  debt  to  the  creditor  and  proceed  against  the  principal 
for  indemnity. 

A  mere  forbearance  to  sue,  or  an  unenforceable  promise  to  forbear,  is  not 
an  extension  of  time  to  the  debtor. 

4.  Surrender  of  securities  by  creditor.  If  the  creditor  sur- 
renders to  the  debtor  securities  held  for  the  enforcement  of  the 
debt,  the  guarantor  is  discharged  to  the  extent  he  may  be  injured 
thereby. 

5.  Failure  of  creditor  to  proceed  against  debtor  after  notice. 
In  New  York  and  some  other  states,  if  the  guarantor  directs  the 
creditor  to  proceed  against  the  debtor,  and  the  creditor  fails  to  do 
so,  the  guarantor  is  discharged  if  the  debtor  afterwards  becomes 
insolvent.  This  is  also  a  statutory  rule  in  some  states ;  but  gener- 
ally it  is  not  in  force,  and  it  does  not  apply,  even  in  New  York, 
to  an  indorser  of  a  negotiable  instrument. 

6.  Revocation  by  guarantor.  If  the-  consideration  for  a  guaranty 
consists  of  an  act  to  be  done  in  tiie  future  by  the  guarantee,  a 
notice  of  revocation  before  the  act  is  done  will  be  effectual  and 
will  relieve  the  guarantor.    If  the  consideration  consists  of  a  scries 


154  GUARANTY  [Cu.  VllI 

of  acts  to  be  done  by  tbe  c^uarantec,  notice  of  revocation  will  be 
effectual  as  to  those  not  yet  done,  but  will  be  ineffectual  as  to 
those  already  done. 

Ii.\\iiitp/t-  8.  15  writes  to  X,  "  If  you  let  C  have  goods  for  his  store  during 
the  coming  year,  I  will  guarantee  payment."  On  January  lo  X  lets  C  have 
goods  to  the  value  of  :{^I50,  and  on  February  5  to  the  value  of  #175.  On 
March  i  B  notifies  X  that  he  will  no  longer  be  liable  for  goods  sold  to  C.  On 
March  15  X  lets  C  have  $250  worth  of  goods.  B  is  liable  as  guarantor  for 
$325,  but  not  for  the  $250. 

7.  Death  of  g7iarantor.  The  death  of  the  guarantor  has  the 
same  effect  as  an  express  revocation,  though  some  states  require 
that  the  guarantee  shall  have  actual  notice  of  the  death  in  order 
that  it  may  operate  as  a  revocation. 

Example  9.  In  Example  8,  suppose  B  died  on  March  i.  In  many  states 
this  would  operate  to  revoke  the  guaranty  as  to  any  advances  made  thereafter. 
In  other  states  it  would  operate  only  from  the  time  X  had  notice  of  it.  In  any 
event  B's  estate"  would  be  liable  for  the  advances  made  before  his  death. 

Surety.  In  the  case  of  a  surety,  as  distinguished  from  a  guarantor,  some 
special  results  of  revocation  or  death  must  be  noted : 

a.  It  is  a  technical  rule  of  the  law  (when  not  modified  by  statute)  that  where 
an  obligation  is  joint,  the  death  of  one  joint  obligor  extinguishes  the  liability 
as  to  him,  and  the  survivor  alone  is  liable.  If  A  as  principal  and  B  as  surety 
jointly  promise  to  pay  C,  the  death  of  B  relieves  his  estate.  But  if  the  promise 
is  joint  and  several  ("  We,  A  as  principal  and  B  as  surety,  jointly  and  severally 
promise  to  pay  C  $100"),  the  death  of  one  party  does  not  relieve  his  estate. 
This  technical  rule  has  now  been  very  generally  changed  by  statute  so  that  the 
death  of  a  joint  obligor  does  not  extinguish  the  claim  as  to  his  estate.  Under 
the  above  rule  the  death  of  a  joint  surety  would  of  course  revoke  liability  as 
to  future  advances. 

b.  If  the  suretyship  is  joint  and  several,  the  death  of  the  surety  docs  not  revoke 
the  suretyship,  as  does  the  death  of  a  guarantor.  A  guaranty  is  collateral,  but 
a  suretyship  is  a  part  of  the  original  contract  itself  and  stands  or  falls  with  it. 

c.  (i)  In  the  case  of  an  indemnity  bond  for  an  indefinite  period  the  surety 
may  at  any  time  give  notice  of  revocation,  leaving  the  employer  whose  em- 
ployee's fidelity  was  assured  a  reasonable  time  to  get  other  sureties.  (2)  But 
in  the  case  of  indemnity  bonds  for  a  definite  period  the  surety  cannot  with- 
draw unless  the  employee  or  officer  has  defaulted  so  that  he  may  be  removed, 
or  unless  the  surety  has  reserved  in  the  bond  the  right  to  withdraw  upon  due 
notice.  (3)  The  death  of  a  surety  on  a  joint  and  several  bond  does  not  termi- 
nate the  liability  of  his  estate  even  as  to  a  breach  by  the  principal  occurring 
after  the  death  of  the  surety. 

An  indemnity  is  in  some  respects  like  a  suretyship  and  in  some  respects 
like  a  guaranty. 


§§92,93]  LIABILITY  OF  GUARANTOR  155 

8.  Retention  of  principal  after  kriowledge  of  his  dishonesty. 
If  the  guaranty  be  against  the  dishonesty  or  defalcation  of  the 
principal,  the  guarantor  will  be  discharged  if  the  guarantee, 
after  knowledge  of  the  principal's  dishonesty,  continues  him  in 
his  service. 

9.  Main  coji tract  nonenforceable  against  principal .  If  the  main 
contract  is  illegal,  and  so  not  enforceable  against  the  principal,  the 
collateral  contract  of  guaranty  is  also  nonenforceable.  This  rule 
has  been  applied  to  usurious  contracts.  So  also,  if  the  main  con- 
tract was  procured  from  the  principal  by  fraud  and  cannot  for 
that  reason  be  enforced,  the  guaranty  of  it  is  also  unenforceable 
if  the  principal  has  avoided  the  main  contract  on  the  ground  of 
fraud.  The  same  has  been  held  of  contracts  procured  by  duress, 
but  some  cases  have  escaped  this  rule  where  the  guarantor 
signed  with  knowledge  of  the  duress.  Failure  of  consideration, 
which  renders  the  main  contract  nonenforceable,  also  relieves 
the  guarantor.  But  the  fact  that  the  principal  is  an  infant, 
or  of  unsound  mind,  or  a  married  woman,  and  so  may  escape 
liability,  will  not  release  the  guarantor.  These  are  defenses 
personal  to  the  principal,  and  the  guarantor  cannot  avail  himself 
of  them. 

92.  Guarantor's  liability.  The  guarantor's  liability  is  fixed  by 
the  terms  of  the  contract.  This  may  stipulate  for  a  definite  sum 
or  for  such  sum  as  the  debtor  is  liable  for.  The  guarantor  may 
be  compelled  to  pay  without  resorting  to  the  principal  debtor,  un- 
less, indeed,  he  has  merely  guarantied  the  collection  of  a  debt, 
in  which  case  the  creditor  must  first  exhaust  his  remedies  against 
the  debtor. 

Examples:  I.  "I  hereby  guaranty  the  within  note.  C."  The  holder  of 
the  note  may  proceed  against  C  without  first  proceeding  against  the  maker  of 
the  note. 

2.  "  I  hereby  guaranty  the  collection  of  the  within  note.  C."  The  holder 
must  first  exhaust  his  remedies  against  the  maker  before  proceeding  against  C. 

93.  Guarantor's  remedies.  A  guarantor  who  lias  paid  his  ])rin- 
cipal's  debt  or  obligation  is  entitled  to  the  following  remedies. 

I.  Indemnity  against  principal.  The  guarantor  may  recover 
from  his  princif)al  all  money  properly  paid  on  account  of  ihe 
guaranty,  together  with  any  costs  reasonably  incurred  in  defeiKling 


156  GUARANTY  [Cn.  VIII 

the  creditor's  claim.  In  order  to  safeguard  himself  the  jj^uar- 
antor  should  notify  the  principal  of  an  intended  payment,  in  order 
that  the  principal  may  interpose  to  the  creditor's  claim  any 
defense  he  thinks  fit. 

2.  Siibroi^atioN  to  rights  of  creditor.  The  guarantor  is  entitled 
to  be  subrogated  to  all  collateral  securities  held  by  the  creditor 
for  the  payment  of  the  debt. 

Exatnple  i.  B  borrows  money  of  A  and  gives  as  security  certain  bonds 
in  pledge  and  also  the  guaranty  of  C.  C  pays  the  debt  to  A.  C  is  entitled  to 
the  bonds  in  pledge  as  security  for  his  claim  against  B. 

3.  Contribution  froju  cog  nam  n  tors.  If  two  or  more  persons 
are  joint  guarantors  for  the  principal,  and  one  of  them  pays  the 
entire  debt,  he  is  entitled  to  a  pro  rata  contribution  from  his 
co-guarantors.  If  one  be  insolvent  or  out  of  the  jurisdiction  the 
others  may  be  compelled  to  contribute  ratably. 

Example  2.  C,  D,  and  E  are  coguarantors  for  a  debt  of  $1200  owed  to 
B  by  A.  C  pays  the  entire  debt.  He  is  entitled  to  recover  at  law  $400  each 
from  D  and  E.  If  E  be  insolvent  and  unable  to  pay,  then  C  may  recover  in 
equity  $600  from  D. 

Forms  of  Guaranty 

A  general  guaranty,  or  '"  letter  of  guaranty,"  of  future  advances 
may  be  as  follows  : 

I  hereby  guaranty  to  any  person  advancing  money  (or  selling  goods,  or 

whatever  the  act  may  be)  to  [Principal^  not  exceeding  dollars,  the 

payment  therefor  at  the  expiration  of  the  credit  which  shall  be  given. 

(Date) (Signature)  \Guaratitor'' s  Name'] 

(Address) 


A  special  guaranty  of  future  advances  may  be  as  follows : 

To  \^Guarantee  or  Creditor] 

I  will  be  responsible  for  goods  (specify  a  particular  kind  if  desired)  sold 
by  you  to  ^Principal]  to  an  amount  not  exceeding  in  value  an  aggregate 
of  dollars. 

(Date) (Signature)  [Guarantor's  Name] 

(Address) 


§93]  REVIEW  QUESTIONS  AND  PROBLEMS  157 

A  guaranty  of  contemporaneous  credit  may  be  as  follows,  and 
would  usually  be  attached  to  another  contract : 

In  consideration  of  the  agreement  of  [Principa/']  above  set  forth,  I  hereby 
guaranty  to  the  said  {Creditor)  that  the  above-named  [Piincipal]  will  well  and 
faithfully  perform  everything  by  the  foregoing  agreement  on  his  part  to  be 
performed  at  the  times  and  in  the  manner  above  provided. 

(Date) Signature  [Gicaranfor'] 

A  guaranty  of  a  past  credit  should  state  a  new  consideration. 

In  consideration  of  one  dollar  to  me  in  hand  paid,  the  receipt  whereof  is 
hereby  acknowledged,  I  hereby  guaranty,  etc. ;  or, 

In  consideration  of  the  extension  of  time  given  by  [Creditor-Guarantee'] 
to  [Debtor-Principal]  upon  the  above  agreement,  I  hereby  guaranty,  etc. ; 
or, 

In  consideration  of  the  discontinuance  of  proceedings  by  [Creditor-Guar- 
antee'] instituted  by  him  against  [Debtor-Principal]  I  hereby  guaranty,  etc. 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  86.  Define  guaranty;  guarantor;  guarantee;  principal.  Distin- 
guish a  surety  from  a  guarantor ;  an  indorser  from  a  guarantor ;  guaranty  of 
payment  from  guaranty  of  collection.    What  is  a  continuing  guaranty  ? 

87.  How  must  a  guaranty  be  evidenced.!"  Does  this  extend  to  an  indemnity 
contract  ?    Distinguish  an  indemnity  contract. 

Problem  i.  X  buys  goods  of  C.  B  says,  "  If  you  let  X  have  the  goods, 
I  will  pay  you  if  he  does  not."    X  does  not  pay.    C  sues  B.    Result? 

88.  Does  a  guaranty  require  a  consideration  ?  What  constitutes  the  con- 
sideration in  a  contemporaneous  guaranty?    in  a  subsequent  guaranty? 

Problem  2.  X  buys  goods  of  C,  payable  in  thirty  days.  At  the  end  of 
the  thirty  days  B  writes  C,  "  If  you  will  give  X  thirty  days  more,  I  will  be 
answerable  for  his  paying  the  claim."  C  lakes  X's  note  for  thirty  days  more. 
It  is  not  paid.    C  sues  B.    Result? 

Problem  J.  In  the  above  case  C  docs  not  take  a  note,  but  simply  refrains 
from  suing  X  for  thirty  days.    Result? 

89.  Is  it  necessary  to  communicate  to  the  guarantor  an  acceptance  of  the 
guaranty  ?    When  ? 

90.  Is  it  necessary  to  jjivc  the  guarantor  notice  of  the  default  of  the  jjfin- 
cipal?  If  so,  under  what  circumstances?  Is  the  guarantee  bound  to  inform 
the  guarantor  of  facts  known  to  him  affecting  the  risk?    Illustrate. 

91.  What  will  di.scharge  a  guarantor?  Will  bankruptcy  of  principal?  Will 
covenant  not  to  sue  principal?   Will  release  of  principal  reserving  rights  against 


158  GUARANTY  [ru.viir 

guarantor?  Illustrate  alteration  of  contract.  What  is  an  extension  of  time  to 
the  debtor?  Effect  of  surrondcring  securities  by  creditor?  Is  creditor  bound 
to  proceed  against  debtor  if  requested  by  guarantor?  When  may  a  guaranty 
be  revoked?  What  is  the  effect  of  the  death  of  a  guarantor?  of  a  surety? 
Difference  between  joint  promises  and  joint  and  several  promises?  What  are 
the  rights  of  a  surety  on  an  indemnity  bond  ?  When  will  inalMJity  to  enforce 
the  main  contract  discharge  the  guarantor  and  when  not? 

Problem  4.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  a  release 
and  then  sues  15  on  the  guaranty.    Result  ? 

Froblcin ^.    In  the  above  case  C  releases  B  and  then  sues  X.    Result? 

Problon  6.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  "  a  release 
in  full  of  said  claim,  reserving,  however,  all  rights  in  respect  thereto  against 
B."    C  sues  B  on  the  guaranty.    Result? 

Problem  7.  B  guaranties  X's  debt  to  C.  Afterwards  C  gives  X  a  valid  and 
enforceable  extension  of  time.  When  this  time  expires  X  does  not  pay  and 
C  sues  B.    Result? 

92.  May  the  guarantee  proceed  against  the  guarantor  without  first  pro- 
ceeding against  the  principal?    Illustrate. 

Problem  8.  X  gives  C  a  promissory  note.  B  writes  and  signs  on  the  back 
of  the  note,  "  I  hereby  guaranty  the  collection  of  the  within  note."  X  does 
not  pay  the  note.    C  sues  B.    Result? 

93.  What  are  the  guarantor's  remedies  against  the  principal?  What  is  his 
right  of  subrogation  ?  of  contribution  ? 

Problem  g.  X  gives  C  a  promissory  note  secured  by  a  mortgage  on  X's 
property.  B  guaranties  the  payment.  After  maturity  C  sues  and  recovers  from 
B.    What  are  B's  rights  against  X  ? 

Problem  10.  X  owes  C,  and  B,  D,  and  E  guaranty  the  debt.  C  recovers 
from  B.    What  are  B's  rights? 


CHAPTER  IX 

NEGOTIABLE  INSTRUMENTS 

I.    Nature  and  Characteristics 

94.  Kinds  of  negotiable  instruments.  Negotiable  instruments 
are  written  contract  obligations  which  can  be  transferred  from 
hand  to  hand  hke  money.  They  are  instruments  of  trade  or  of 
credit ;  that  is,  they  are  a  substitute  for  money  or  an  evidence 
of  a  postponed  debt.  They  may  be  issued  by  private  persons, 
or  by  banks,  or  by  the  government. 

Examples:  i.  If  B  buys  a  bill  of  goods  of  C  he  may  {a)  pay  money, 
which  may  be  either  coin,  promises  of  the  government  to  pay  or  promises 
of  a  national  bank  to  pay ;  {b)  give  a  check  on  his  bank ;  {c)  give  his  prom- 
issory note;  {d)  accept  a  bill  of  exchange  drawn  on  him  by  the  seller; 
(e)  transfer  D's  check,  promissory  note,  or  bill  of  exchange  drawn  or  payable 
to  his  (B's)  order  or  to  bearer ;  or  {f)  draw  and  deliver  a  bill  of  exchange  on 
E  (who  owes  B),  payable  to  C's  order.  In  any  case,  as  above,  B  has  given 
C  a  negotiable  instrument,  except  where  he  pays  coin.  But  even  coined 
money  is  in  fact  a  negotiable  chattel,  for,  whatever  title  or  want  of  title  there 
may  have  been  in  B,  the  taker  of  it  for  value  gets  a  good  title. 

2.  If  any  instrument  given  above  is  payable  on  demand,  it  is  essentially 
an  instrument  of  trade  taking  the  place  of  money;  but  if  it  is  payable  at 
some  future  day,  it  becomes  essentially  an  instrument  of  credit,  because  B 
secures  a  postponement  of  the  payment  of  his  debt,  that  is,  secures  a  term  of 
credit  from  C.  But  even  an  instrument  payable  on  demand  is  also  one  of 
credit,  because  until  actually  presented  for  payment  it  is  taken  on  the  credit 
of  the  one  issuing  it. 

The  principal  kinds  of  negotiable  instruments  arc  as  follows : 

a.  Bills  of  exchange,  foreign  and  inland.  These  are  orders 
by  one  person  to  another  to  pay  money  to  a  third  person  or 
someone  named  by  him,  or  to  bearer  (sect.  96). 

b.  Promissory  notes,  including  notes  and  certificates  of  de- 
posits by  banks.  These  are  p7-oiniscs  by  one  person  to  pay  money 
to  another  or  someone  named  by  him,  or  to  bearer  (sect.  96). 

'59 


i6o  NEGOTIAIU.K  INSTRUMENTS  [Cn.  IX 

c.  Checks,  or  orders  by  depositors  on  their  banks  to  pay 
money  to  a  third  person  or  someone  named  by  him,  or  to 
bearer  (sect.  96). 

d.  Bonds,  or  promises  in  a  special  form  by  corporations, 
cities,  or  ^governments  to  pay  money  to  a  person,  or  to  a  person 
named  by  him,  or  ti>  bearer  (sect.  96). 

Tlie  instrument  first  used  was  the  foreign  bill  of  exchange, 
by  which  merchants  in  one  country  were  enabled  to  pay  debts  in 
another  country  without  the  risk  of  sending  money  across  seas. 
The  Florentines  or  the  Venetians  introduced  these  instruments 
into  England  as  early  as  the  thirteenth  century.  The  inland 
bill  was  later  introduced  to  serve  the  same  purpose  between 
different  parts  of  the  same  country.  In  this  country  an  inland 
bill  is  one  drawn  and  payable  within  the  same  state.  A  bill 
drawn  in  New  York  and  payable  in  Chicago  would  be  by  our 
law  a  foreign  bill. 

Example  3.  B  in  New  York  wishes  to  pay  a  debt  to  C  in  London. 
{a)  If  B  has  a  debtor,  D,  in  London,  he  may  draw  a  bill  of  exchange  on  D 
payable  to  C  or  order  and  send  it  to  C,  who  can  present  it  to  D  and  obtain 
payment.  {l>)  B  may  buy  in  New  York  a  bill  of  exchange  drawn  by  F  in 
New  York  on  his  debtor,  E,  in  London,  payable  say  to  G's  order.  G  sells  and 
indorses  it  to  B,  and  B  indorses  it  to  C  and  sends  it  to  C,  who  presents  it  to 
E  and  obtains  payment,  (r)  B  may  buy  at  a  New  York  bank  a  bill  of  exchange 
drawn  by  that  bank  on  a  London  bank,  payable  to  C  or  his  order ;  B  sends  it 
to  C,  who  presents  it  at  the  London  bank  and  receives  payment.  By  these 
methods  payments  are  made  between  New  York  and  London,  or  vice  versa, 
without  transferring  money.  In  the  end  some  big  banking  concern  in  one 
place  may  export  gold  to  the  other  place  to  settle  balances. 

A  check  is  a  special  kind  of  bill  of  exchange,  being  a  bill 
drawn  by  a  depositor  on  his  bank,  payable  on  demand.  A  bill 
of  exchange  drawn  by  one  bank  on  another  is  often  called 
a  draft.  It  is  simply  a  check  and  is  more  properly  called  a 
cashier's  check. 

Promissory  notes  were  once  held  by  the  English  courts  not 
to  be  negotiable  instruments,  but  Parliament  in  1704  passed 
an  act  providing  that  they  should  be  negotiable  the  same  as 
bills  of  exchange,  and  such  is  the  law  in  this  country.  When 
these  are  issued  by  banks,  we  call  them  bank  notes.  A  certifi- 
cate of  deposit  is  another  form  of  promissory  note  issued  by  a 


§95]  NATURE  AND  CHARACTERISTICS  l6i 

bank  to  one  who  deposits  money  and  takes  the  note  of  the  bank 
for  it.  Corporations  and  governments  issue  long-time  promises- 
to-pay  in  the  form  of  bonds,  which  in  the  case  of  private  corpo- 
rations are  usually  secured  *by  a  mortgage  on  the  corporate 
property. 

Bills  of  lading  at  common  law  and  warehouse  receipts  by  statute  are 
given  a  quasi-negotiable  character,  but  these  do  not  fall  within  the  generally 
accepted  category  of  negotiable  instruments.  By  the  Federal  Bills  of  Lading 
Act  and  by  the  Uniform  Bills  of  Lading  Act  order  and  bearer  bills  of  lading 
are  rendered  fully  negotiable.  By  the  Uniform  Warehouse  Receipts  Law  and 
the  Uniform  Sales  Act,  warehouse  receipts  and  other  documents  of  title  run- 
ning to  order  or  bearer  arc  given  a  limited  negotiability  but  are  not  negotiable 
in  the  hands  of  a  thief  or  finder.  Stock  certificates  have  also  a  quasi-negotiable 
standing.  The  first  two  are  promises  to  deliver  goods,  and  the  last  is  an 
evidence  of  an  interest  in  a  business  enterprise,  while  negotiable  instruments 
have  to  do  with  unconditional  promises  or  orders  to  pay  money.  The  above 
instruments  resemble  negotiable  instruments  mainly  in  that  they  are  trans- 
ferred from  hand  to  hand  by  indorsement,  but  they  are  not,  like  negotiable 
instruments,  a  kind  of  substitute  for  money.  They  are  paper  evidences  of 
some  property  right. 

95.  Characteristics  of  negotiable  instruments.  There  are  three 
characteristics  that  serve  to  distinguish  negotiable  instruments 
from  ordinary  contracts. 

1.  Presumptive  cojisideration.  If  a  contract  is  in  the  form  of 
a  negotiable  instrument,  it  has  a  presumption  of  consideration, 
whereas  in  an  ordinary  contract  one  who  brings  an  action  upon 
it  must  prove  that  the  promise  he  is  seeking  to  enforce  rests 
upon  a  consideration. 

Exa7nplc  i .  {a)  "  On  April  I  next,  I  promise  to  pay  to  the  order  of 
A.  B.  one  hundred  dollars.  C.  D."  (/')  "  On  April  i  next,  I  promise  to 
deliver  to  the  order  of  A.  B.  one  hundred  bushels  of  wheat.  C.  D."  In  the 
first  example  A.  B.  in  an  action  against  C.  D.  need  not  prove  any  considera- 
tion ;  it  is  for  C.  D.  to  prove  that  there  was  none,  if  he  can  do  so.  In  the 
second  example  A.  B.  in  an  action  against  C.  D.  must  prove  the  consideration 
for  the  promise  to  deliver  the  wheat,  and  if  he  fails  to  do  so  he  will  be 
defeated  in  his  action. 

2.  Days  of  ^race.  Unless  abolished  by  statute,  three  days  of 
grace  beyond  the  time  fixed  are  allowed  for  the  i)ayment  of 
negotiable  instruments,  whereas  in  ordinary  contracts  no  days 
of  grace  arc  allowed.     In  the  examples  given  above,  A.  W.  could 


l62  NEGOTIAHLK  INSTRUMENTS  [Cn.  IX 

not  demand  payment  of  the  money  until  April  4,  while  he 
could  demand  delivery  of  the  wheat  on  April  i.  Days  of  grace 
have  been  very  generally  abolished  by  statute.  They  were 
established  when  means  of  communication  between  distant 
places  were  uncertain  and  slow;  with  the  introduction  of  steam 
the  need  for  them  has  disappeared.^ 

3.  Negotiability.  Negotiability  is  the  important  characteristic 
of  these  instruments.  As  we  have  seen  (sect.  35),  ordinary  con- 
tracts are  often  assignable,  but  the  assignee  cannot  sue  in  his 
own  name  except  by  force  of  statute,  and  when  he  sues  he  is 
subject  to  all  the  defenses  that  might  have  been  set  up  against 
his  assignor.  Bills,  notes,  and  checks,  however,  are  negotiable, 
not  merely  assignable.  Negotiability  carries  with  it  the  following 
results  :  {a)  the  transferee  gets  a  legal  title  and  can  sue  in  his 
own  name ;  {b)  if  the  transferee  is  a  holder  for  value  and  without 
notice  of  defenses  and  obtains  title  before  maturity  of  the  instru- 
ment, he  is  free  from  the  defenses  that  might  have  been  set  up 
against  his  transferor,  except  those  that  operate  to  destroy  the  con- 
tract altogether.  He  is  not  subject  to  the  personal  defenses  of 
fraud,  duress,  want  of  consideration,  want  of  title  in  the  transferor, 
and  the  like,  but  is  subject  to  the  absolute  defenses  of  forgery, 
alteration,  infancy  of  maker,  that  the  statute  declares  the  in- 
strument void  (as  it  does  a  gambling  contract),  etc.  It  is  this 
element  of  negotiability  that  makes  it  necessary  to  treat  these 
contracts  separately. 

Example  2.  (a)  In  Example  i ,  given  above,  assume  that  A.  B.  indorses 
and  delivers  the  note  to  E.  E.  on  March  15,  and  that  E.  F.  sues  the  maker 
C.  D.  If  E.  F.  paid  value  and  had  no  notice  of  any  defect  in  A.  B.'s  title, 
C.  D.  cannot  defend  on  the  ground  that  A.  B.  procured  the  note  by  fraud  or 
without  consideration  ;  but  the  defense  that  C.  D.'s  name  is  forged,  or  that  the 
note  has  been  altered,  would  be  a  good  defense,  {b)  In  Example  i  assume 
that  A.  B.  indorses  and  delivers  to  E.  F.  the  promise  to  deliver  the  wheat,  and 
that  E.  F.  pays  value  and  has  no  notice  of  any  defect.  If  E.  F.  sues  C.  D., 
any  defense  that  would  be  good  against  A.  B.  is  still  good  against  E.  F,  This 
is  an  assignment,  and  an  assignee  stands  in  his  assignor's  shoes. 

1  Days  of  grace  are  still  allowed  in  Mississippi,  Texas,  and  Wyoming.  In 
Massachusetts  and  North  Carolina  days  of  grace  are  allowed  only  on  bills 
payable  on  sight,  while  in  Alaska  they  are  allowed  only  on  paper  payable  at 
a  future  day. 


§96] 


NATURE  AND  CHARACTERISTICS 


163 


96.  Definitions.  The  various  negotiable  instruments  are  named 
and  defined  as  follows  : 

I .  Bill  of  exchange.  A  bill  of  exchange  is  an  unconditional 
order  in  writing  addressed  by  one  person  to  another,  signed  by 
the  person  giving  it  (called  the  drawer),  requiring  the  person  to 
whom  it  is  addressed  (called  the  drawee)  to  pay  on  -demand 
or  at  a  fixed  or  determinable  future  time  a  sum  certain  in 
money  to  the  order  of  a  designated  person  (called  the  payee) 
or   to   bearer. 

The  person  upon  whom  the  bill  is  drawn,  that  is,  the  drawee, 
may  be  asked  to  signify  his  assent  to  honor  the  bill,  and  if  he 
does  so  he  becomes  an  acceptor.  This  assent  is  usually  signified 
by  writing  his  name  with  the  word  "Accepted"  across  the  face 
of  the  bill.  When  a  bank  so  signifies  its  assent  to  honor  a  check, 
the  check  is  said  to  be  "certified." 

If  not  payable  to  order  or  bearer,  the  bill  would  be  non- 
negotiable. 

Bill  of  Exchange  with  Acceptance 


The  above  bill  was  accepted  November  23,  191  2.  It  was  due  ninety  days 
from  sight,  and  hence  became  due  ninety  days  from  November  23,  or  on 
I-ebruary  21,  191 3.  It  could  be  transferred  by  an  indorsement  on  the  back 
by  Everett,  Moore  &  Co.,  the  paytes. 

A  foreign  bill  of  exchange  is  often  drawn  in  a  set  of  two  or 
three  duplicate  parts,  each  part  numbered  and  referring  to  the 
Others.  The  parts  arc  used  to  avoid  the  chance  of  loss  in  the 
mails  or  to  save  time  in  securing  an  acceptance. 


164 


N  1-XU )'IM  A  HL1-:   1 NS  TRUM  KNTS 


[Cu.  IX 


It  there  were  three  jxirls,  llie  iirst  would  read,  "  second  and  third  of  same 
tenor  and  date,  unpaid,"  and  the  second  would  read,  "  first  and  third  of  same 
tenor  and  date,  unpaid,"'  and  the  tliird  would  read,  "  first  and  second  of 
same  tenor  and  date,  unpaid.' 

a.  Suppose  Sherwood  &  Co.  buy  the  above  exchange  in  New  York  in 
order  to  pay  a  debt  to  James  &  Co.  in  Calcutta,  India.  Were  it  payable  at 
sight  or  at  a  fixed  future  lime,  they  would  indorse  each  part  to  James  &  Co. 
and  send  one  part  by  one  steamer  and  another  by  a  second  steamer  m  order 
to  avoid  danger  of  loss  or  delay.    1  n  such  case  two  parts  would  be  enough. 


Bills  in  a  Si:r 


/ 


THE  BATTERY  PARK  NATIONAL  BANK 


U  W-^?^5<^i.tf-<?^7~''*ZjC*;^V'  /^';//^y^~>  .^'f9\i-^y<^  &y£cc//«/i^ry 


^    CO        /— '> 


THE  BATTERY  PARK  NATIONAL  BANK 


b.  Ki,  it  is  payable  after  sight,  if  it  is  all  sent  to  Calcutta  and  from  there  to 
London,  it  would  be  weeks  before  any  part  could  be  presented  for  acceptance, 
and  it  would  then  run  ninety  days  after  such  presentation.  But  if  one  part  is 
sent  direct  to  London  for  acceptance,  the  final  due  date  will  be  hastened  and 
the  present  worth  of  the  bill  increased.  Therefore  one  part  is  sent  to  London 
indorsed,  "  At  the  disposal  of  the  second  or  third,  duly  indorsed."    The  second 


§96]  NATURE  AND  CHARACTERISTICS  165 

and  third  will  then  be  indorsed  to  James  &  Co.  and  sent  to  Calcutta  by  different 
mails,  with  the  information  that  the  first  has  gone  direct  to  London  for  accept- 
ance. James  &  Co.  in  Calcutta  can  then  deal  with  the  bill,  assuming  it  would 
be  accepted  about  December  i  and  would  become  due  ninety  days  thereafter. 
They  will  send  parts  two  and  three  to  London  in  time  to  have  them  there 
when  the  bill  becomes  due,  or  they  will  sell  them  in  Calcutta  and  the  buyer 
will  send  them  to  London. 

The  drawee  should  accept  but  one  part ;  for  if  he  accepts  two,  each  might 
be  indorsed  to  a  different  holder,  and  the  acceptor  would  be  liable  on  each. 
A  holder  should  not  indorse  parts  to  different  persons,  or  he  will  be  twice  liable. 
When  the  bill  is  paid,  the  acceptor  should  take  up  the  part  he  has  accepted. 

2.  Promissory  note.  A  promissory  note  is  an  unconditional 
promise  in  writing  made  by  one  person  (called  the  maker)  and 
signed  by  him,  engaging  to  pay  on  demand  or  at  a  fixed  or 
determinable  future  time  a  sum  certain  in  money  to  the  order 
of  another  person  (called  the  payee)  or  to  bearer. 

If  not  payable  to  order  or  bearer,  the  note  would  be  non- 
negotiable. 

Promissory  Note 


^  THE  BATTERY  PARK  NATIONAL  BANK  o^---'-o-^- 


It  is  not  necessary  to  state  the  place  where  the  note  is  payable,  but  this 
is  usually  done  in  commercial  paper  in  order  to  facilitate  presentment  for 
payment.  This  note  may  be  indorsed  on  the  back  by  Robert  H.  Moore  &  Co. 
The  words  "with  interest"  may  be  written  in  after  the  words  "value 
received  "  if  the  note  is  to  draw  interest.  The  above  note  may  be  discounted, 
say  at  the  bank  where  payable ;  that  is,  the  payee  may  indorse  and  sell  it  to 
the  bank  for  its  present  worth.  How  much  is  #2500,  payable  in  three  months, 
worth  in  New  York  where  interest  is  C  per  cent? 

3.  Certificate  of  deposit.  A  certificate  of  deposit  is  in  effect  a 
promis.sory  note  given  l^y  a  bank  to  a  depositor,  acknowledging 


1 66 


NE(]()lIAin,K  INSTRUMKNTS 


[Cii.  IX 


the  receipt  of  the  deposit  and  promising  to  pay  it  to  the  order  of 
the  depositor.  It  may  be  made  jxiyable  on  demand,  or  it  may  be 
made  payable  at  a  fixed  future  lime  with  interest.  If  one  has  a 
special  fund  which  he  wishes  to  put  into  a  bank  but  against  which 
he  does  not  wish  to  draw  checks,  he  ordinarily  takes  a  certificate 
of  deposit. 

Cektificatic  of  Df.posit 


b  y'  THE  BATTERY  PARK  NATIO  NAL  BANK 


NOT   SUBJECT    TO   CHECK 


Xaau^^IL. 


4.  Check.  A  check  is  a  bill  of  exchange  drawn  on  a  bank  and 
payable  on  demand.  If  payable  at  a  future  time,  it  would  be  an 
ordinary  bill  of  exchange.  When  one  deposits  money  in  a  bank, 
he    receives  a  bank   book  with    the   amount    he   has    deposited 


Check 


THE  BATTERY  PARK  NATIONAL  BANK 

2+  STaTE    ST 


^ 


entered  in  it.  He  can  then  draw  checks  against  this  deposit.  If 
a  payee  wishes  to  be  sure  that  the  check  is  good,  he  can  present 
the  check  to  the  drawee  bank  for  certification  or  ask  the  drawer  to 
have  it  certified.    When  certified,  the  bank  becomes  liable  to  the 


§96] 


NATURE  AND  CHARACTERISTICS 


167 


payee,  and  it  charges  the  certified  check  against  the  depositor's 
account  as  a  check  which  it  has  actually  paid. 


Certified  Check. 


THE  BATT^Y  PARK;;NATI0NAL  BANK 


C^t,  %<!^aa:^ 


^_^2-fci^  •S'^k^feJi^LSI. 


The    words  "  Accepted,"   "  Certified,"' 
that  the  bank  has  honored  the  check. 


Good "   are    all   used    to   signify 


5.  Batik  draft  or  check.  A  bank's  check,  often  called  a  draft, 
is  a  check  drawn  by  one  bank  upon  another  bank  and  payable  on 
demand.  If  payable  at  a  future  time,  it  is  a  bill  of  exchange  but 
not  a  check.  One  bank  often  keeps  deposits  in  another  bank  in 
order  to  be  able  to  furnish  these  bank  drafts  or  bills.    A  country 

Bank  Draft  or  Check 


O/i'/ur///. 


J*^ 


.MKTK«)POI.IT,V.\TKr.ST  (',<,'.(  "2^       ^       /2.>-. 


OF  TIIK  (ITT  OF  NfWYOKK. 


bank  will  need  to  be  able  to  furnish  New  York  exchange,  and 
even  a  New  York  bank,  if  not  a  member  of  the  New  York  Clear- 
ing House,  will  need  to  be  able  to  furnish  drafts  or  checks  upon 
a  New  York  bank  that  is  a  member  of  the  clearing  house.  So 
a  large  bank  may  keep  accounts  with  a  London  bank  in  order  to 
issue  its  checks  or  bills  on  London  and  furnish  London  exchange. 


HOM)    OK    CourORATION 


L^nsi^i- 


^>-^  FIRST  MORTGAGE  BOND 

'iiii;i.j:>.i-;j.vj.<.f.<;t:j;»j.i'  ♦-^^ 


^^l,v.vJJ^.^J^J:^,4M 


€he  JI^CVD  li)alicii  U^atcr  <iEonipan);i,  w  iorporatwii  duly  organiz.ed 

and  existing  undrr  the  laws  of  the  State  of  Pennsylvania,  for  value 

received  hereh  promises  to  pay  to  The  Safe  Deposit  Company  of  Pittsburgh, 

County  of  Allegheny,  in  the  State  of  Pe/msyhania,  or  bearer,  the  sum  of 

eJ^^jflvc   IHundrcd   DollarsJ^;^ 

lawful  money  of  the  United  States  of  America,  on  the  first  day  of  October  in 
the  year  nineteen  hundred  and  thirty-five,  together  with  interest  on  said 
sum  from  the  date  hereof  at  the  rate  of  six  per  centum  per  annum, payable 
semiannually  on  the  first  days  of  October  and  April  in  each  year  at  the  ofiice 
of  The  Safe  Deposit  Company  of  Pittsburgh,  in  the  State  of  Pennsylvania, 
on  presentation  of  the  coupons  hereto  attached  as  they  severally  become  due. 

^bis  bonb  is  one  of  a  series  of  thirty  bonds, numbered  consecutively  from  one 
to  thirty,  both  numbers  inclusive,  each  of  the  denomination  of  five  hundred 
dollars,  all  being  of  like  tenor  and  date,  and  all  secured  by  first  mortgage 
upon  the  water  works  of  said  The  New  Haven  Water  Company,  in  and  near 
the  Borough  of  New  Haven,  in  Fayette  County,  Pe?i?isylvania,  together 
with  lands,  machinery,  pipes,  properties,  rights,  privileges  and  franchises 
now  held  and  ozvned  or  hereafter  to  be  acquired  by  it,  and  all  its  tolls,  in- 
come, rents,  issues  and  profits,  executed  by  said  The  New  Haven  Water 
Company  to  The  Safe  Deposit  Company  of  Pittsburgh,  of  the  County  of 
Allegheny,  in  the  State  of  Pennsylvania,  Trustee,  and  dated  the  first  day 
of  October,  igr^,  and  duly  acknowledged  according  to  law  and  recorded  in 
the  proper  records  in  the  Recorder's  Ofiice  in  Fayette  County,  in  the  State 
of  Pennsylvania.  This  bond  shall  not  become  obligatory  until  authenticated 
by  the  execution  by  said  trustee  of  the  certificate  hereto  attached. 

%n  ^cstimonp  IDbcreof,  the  said  The  New  Haven  Water  Company  has 
caused  this  instrument  to  be  sealed  with  its  Corporate  Seal,  and  to  be  signed 
by  its  President  and  Secretary  and  the  coupons  hereto  attached  to  be  signed 
hy  its  Treasurer,  at  New  Haven  aforesaid  this  first  day  of  October,  igi^. 

The  New  Haven  Water  Company., 


CORPORATn 
SEAL 


Preiident. 

Secret  ar\'. 


168 


96] 


NATURE  AND  CHARACTERISTICS 


169 


These  drafts  or  banker's  checks  are  usually  drawn  without  being  counter- 
signed by  the  president  or  other  official,  but  some  banks  require  this  out  of 
extra  caution.  Drafts  may  be  drawn  a  given  number  of  days  after  sight  or 
after  date. 

In  the  example  of  a  bill  in  sets,  given  above,  we  have  a  banker's  bill  of 
exchange.  .It  is  drawn  by  a  New  York  bank  on  a  London  bank  and  is  payable 
ninety  days  after  sight,  that  is,  ninety  days  after  it  is  first  presented  at  the 
London  bank.  This  is  called  London  exchange ;  it  is  a 
bill  of  exchange  drawn  on  a  bank  in  London. 

6.  Bonds.    A  negotiable  bond  is 
in  effect  a  promissory  note  under 
seal  issued  by  a  corporation,  gov- 
ernment, or  governmental  political 
division  like  a  city  or  county.    At 
common  law  a  negotiable  instru- 
ment could  not  be  under  seal 
if  an  instrument  otherwise  ne- 
gotiable was  duly  sealed, 
it  thereby  ceased  to  be       ,<;„,..__,_,_^ 
negotiable.     But  by        ^ffilKSiU^ 
custom   recognized        .^^^^mffi^-^^ 
by   courts   these         ^^');i4^r^°''.^»7,Sr;*r^;? 
instruments 
issued  by 


'if7iimmrf//av:rM.7y.j>'r  ,i/it,  APR.  1313 

I  '^?/'-,y  The  SAFt  DCPOStxCOMPANY/l^ 

*y!/!/7rsr^T/a&w/VM.f'r\i/*'w  j/z-fr  OCT.  131  0 

a  ,.■>?./  ,i^TMC  SArC  DtfOSITCOMPANV-r' 


ms2snmiiMY^ 


^^^^255^  i^  g^^gZS?^ 


..     -ArK  18231 


^^^w^  i^^^^'^^^r^-p^ 


COUI'O.NS 


corporations  and  governmenls  under  the  corporate  or  govern- 
mental seal  came  to  be  regarded  as  negotiable.  But  not  all  bonds 
are  negotiable.  Bonds  are  either  coupon  bonds  or  registered 
bonds.  The  latter  arc  bonds  payable  to  a  specified  person  whose 
name  is  registered  in  the  books  of  the  corporation  or  government, 
and  they  are  transferable  only  by  registering  the  name  of  the 
transferee.  Coupon  bonds  are  bonds  payable  to  a  i)ers()n.  or 
order,  or  bearer,  and  have  attached  to  them  coupon  notes  for  each 


I70  NEGOTIAHLK   INS'il<.UMKNTS  [Cii.  IX 

installment  of  interest  as  it  falls  due.  These  coupons  arc  cut  off 
and  i)resented  for  jxiyment  of  interest,  or  they  may  be  severed 
before  maturity  and  nei;otiated  like  a  jM-omissory  note.  The  nego- 
tiable bond  is  usually  a  coupon  bond  payable  tt)  bearer.  A  bond 
is  a  quite  formal  instrument  containing  not  only  the  negotiable 
promise  but  also  specifications  concerning  the  particular  issue  of 
bonds  of  which  it  is  one,  and  the  mortgage  security  therefor. 
Since  a  mortgage  cannot  well  be  made  to  each  bondholder,  it  is 
made  to  a  trustee  or  trustees  for  the  benefit  of  bondholders.  The 
bond  is  signed  by  the  proper  officials  and  usually  bears  the  cor- 
porate or  governmental  seal.  ]5ut  these  instruments  are  some- 
times issued  without  a  seal,  and  although,  when  so  issued,  they 
are  not  technically  bonds,  they  are  nevertheless  classed  as  bonds. 

97.  Negotiable  Instruments  Law.  The  law  of  negotiable  in- 
struments has  been  codified  and  a  uniform  act  passed  in  all  the 
states  and  territories  except  two.^  This  Negotiable  Instruments 
Law  will  be  followed  in  this  chapter.  It  supersedes  the  common, 
or  unwritten,  law  of  negotiable  instruments. 

This  law  is  based  upon  a  similar  codification  in  England 
known  as  the  Bills  of  Exchange  Act.  Hiis  English  act  is  also 
in  force  in  most  of  the  English  colonies. 

II.      EORM 

98.  What  a  negotiable  instrument  must  contain.  An  instru- 
ment, to  be  negotiable  (and  not  merely  a  common-law  contract), 
must  conform  to  the  following  requirements. 

1.  It  must  be  in  writing  and  signed  by  the  maker,  or  drawer. 
A  writing  includes  print,  and  the  writing  may  be  in  pencil. 

Examples :  i.  One  may  sign  in  a  trade  or  assumed  name.  Even  the 
indorsement  by  figures   I,   2,  8  has  been  held  sufficient. 

2.  Only  the  person  who  signs  is  liable.  The  signature  "  A.  B.,  agent,"  or 
"  C.  D.,  treasurer,"  binds  only  A.  B.  or  C.  D.,  and  not  his  principal,  for  these 
are  mere  terms  of  description.  The  signature  should  be  "  X.  Y.,  by  A.  B.,  agent," 
or  "  X.  Y.  Co.,  by  A.  B.,  treasurer."  By  the  custom  of  banks  the  signature 
"  E.  F.,  cashier,"  binds  the  bank  whose  name  appears  on  the  instrument. 

3.  A  forged  signature  does  not  bind  the  one  whose  name  is  forged.  No 
rights  can  be  acquired  by  any  holder  under  a  forged  signature. 

^  The  act  is  not  adopted  in  Georgia  and  Porto  Rico. 


§9Sj  FORM  171 

2.  It  must  contain  an  unconditional  promise  or  order  to  pay 
a  sum  certain  in  money.  A  promissory  note  contains  a  promise. 
A  bill  of  exchange,  or  check,  contains  an  order.  The  point  is 
that  these  must  be  unconditional. 

Examples  .•  4.  "  I  O  U  twenty  dollars "  is  not  a  promise  but  a  mere 
acknowledgment.    So  also,  "  Due  you  twenty  dollars." 

5.  "  Be  so  kind  as  to  let  the  bearer  have  twenty  dollars  "  may,  perhaps,  be 
too  civil  to  be  regarded  as  an  order. 

6.  "  I  promise  to  pay  to  order  of  A.  B.  twenty  dollars  out  of  proceeds  of 
Blackacre  farm  "  is  conditional  and  therefore  nonnegotiable.  There  may  not 
be  proceeds  from  that  farm  sufficient  to  pay. 

7.  "  Pay  to  order  of  A.  B.  twenty  dollars  and  charge  to  account  of  Black- 
acre  farm  "  is  unconditional,  because  it  merely  indicates  the  fund  from  which 
reimbursement  is  to  be  made. 

8.  "  Pay  to  the  order  of  A.  B.  all  the  proceeds  of  Blackacre  farm  "  is  non- 
negotiable  because  the  sum  is  uncertain.  But  the  law  permits  payment  "  with 
exchange  "  or  with  "  costs  of  collection  or  attorney's  fees  in  case  not  paid  at 
maturity,"  although  these  may  render  the  sum  uncertain.  It  also  allows  pay- 
ment by  installments,  with  a  provision  that  upon  default  in  the  payment  of 
any  installment  the  whole  sum  shall  become  due. 

9.  "Deliver  to  order  of  A.  B.  100  bushels  of  wheat "  is  nonnegotiable 
because  not  payable  in  money. 

10.  The  instrument  may  specify  a  particular  kind  of  money,  as  gold  coin, 
silver  dollars,  greenbacks,  or  a  foreign  money,  as  Mexican  silver  dollars. 
There  has  been  much  conflict  as  to  whether  instruments  payable  in  "  current 
funds  "  are  negotiable,  since  current  funds  may  include  the  promissory  notes 
of  banks  (that  is,  bank  notes),  which  are  themselves  merely  negotiable  instru- 
ments. If  payable  in  any  kind  of  legal-tender  money,  there  could  be  no  ques- 
tion ;  but  current  funds  include  more  than  legal-tender  money,  and  courts 
have  differed  as  to  whether  that  phrase  is  the  equivalent  of  money. 

3.  It  must  be  payable  on  demand  or  at  a  fixed  or  determinable 
future  time. 

Exaw/'lcs ;  11.  "On  demand,  pay,  etc.,"  "At  sight,  pay,  etc."  arc  pay- 
able on  demand.  .So  also  if  no  time  for  payment  is  expressed,  the  instrument 
is  payable  on  demand.  Such  instruments  are  due  at  once  and  become  overdue 
after  the  expiration  of  a  reasonable  time. 

12.  "Thirty  days  after  date,"  "On  or  before  Jan.  i,  191  A,"  "Within 
one  year  after  my  death,"  —  these  are  all  fixed  or  dcterminal)le  dates.  "  When 
A.  B.  is  twenty-one  "  is  not,  becau.se  A.  B.  may  never  reach  that  age.  "  Thirty 
days  after  sight,  etc."  is  determinable. 

.\.    It  must  be  payable  to  order  or  to  bearer. 


172  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

Examples  :   13.   "I  promise  to  pay  A.  H.  twenty  dollars  "is  nonnegotiable. 

14.  "I  promise  to  pay  A.  B.  or  order  twenty  dollars"  is  negotiable  when 
indorsed  by  A.  B. 

15.  "I  promise  to  pay  the  bearer  twenty  dollars"  is  negotiable  without 
any  indorsement. 

16.  "I  promise  to  pay  cash  twenty  dollars  "  is  payable  to  bearer. 

17.  If  the  payee  is  known  by  the  maker  to  be  a  fictitious  person,  the 
instrument  is  payable  to  bearer. 

18.  When  an  instrument  payable  to  the  order  of  A.  B.  is  indorsed  in  blank 
by  A.  B.,  it  is  then  payable  to  bearer.  An  indorsement  is  in  blank  when  A.  B. 
simply  writes  his  name  upon  the  back  of  the  instrument. 

19.  An  instrument  may  be  made  payable  to  the  order  of  the  maker,  or 
drawer,  or  drawee,  or  two  or  more  persons  jointly. 

5.  If  the  instrument  is  a  bill  of  exchange,  it  must  name  or 
otherwise  indicate  the  drawee  with  reasonable  certainty. 

Examples:  20.   "To  ,  Mobile,  Alabama,"  is  not  a  bill,  because  the 

drawee  is  neither  named  nor  indicated. 

21.  "To  the  owner  of  the  steamer  Dorrance'''  is  sufficient,  because  the 
drawee  is  indicated,  though  not  named. 

99.  What  a  negotiable  instrument  must  not  contain.  The  rule 
and  the  exceptions  upon  this  point  may  be  stated  as  follows  : 

1.  Rule.  Subject  to  the  exceptions  enumerated  below,  a  nego- 
tiable instrument  must  not  contain  a  promise  or  an  order  to  do 
any  act  in  addition  to  the  payment  of  money. 

Examples:  i.  "  I  promise  to  pay  to  the  order  of  A.  B.  fifty  dollars  and 
also  deliver  to  his  order  100  bushels  of  wheat "  is  nonnegotiable. 

2.  "  Pay  to  A.  B.  or  order  fifty  dollars  and  also  deliver  to  him  my  horse 
Billy  B."  is  nonnegotiable. 

2.  Exceptions.    The  exceptions  to  this  rule  are  given  below : 

a.  The  instrument  may  give  the  holder  an  election  to  require 
something  to  be  done  in  lieu  of  the  payment  of  money.  In  such 
case  the  maker  promises  the  payment  of  money  and  has  no  elec- 
tion to  do  anything  else.  The  holder  may  require  the  payment  of 
the  money,  but  he  may  if  he  chooses  take  something  in  place  of  it. 

Example  3.  "  I  promise  to  pay  to  the  order  of  A.  B.  fifty  dollars,  or  at  his 
election  deliver  to  him  100  bushels  of  wheat"  is  negotiable. 

b.  The  instrument  may  authorize  the  sale  of  collateral  securities 
in  case  of  nonpayment  at  maturity.    The  note  given  to  a  bank 


§100]  FORM  173 

that  lends  money  on  collateral  security  usually  contains  a  provision 
for  the  sale  of  the  securities  in  case  of  default  in  payment. 

c.  The  instrument  may  authorize  the  confession  of  judgment 
upon  nonpayment  at  maturity.  Judgment  notes  are  not  used  in 
some  states,  but  where  they  are  in  use  the  Negotiable  Instruments 
Law  regards  them  as  negotiable. 

d.  The  instrument  may  waive  the  benefit  of  any  law  intended 
for  the  advantage  or  protection  of  the  maker  unless  such  waiver 
is  forbidden  by  the  statute  creating  the  exemption.  In  some 
states  it  is  allowable  to  insert  a  clause  waiving  the  benefits  of 
homestead  and  exemption  laws. 

100.  Nonessentials.  There  are  certain  things  which  may  or 
may  not  appear  in  a  negotiable  instrument,  and  their  presence 
or  absence  will  not  affect  its  negotiability. 

1.  Statement  of  co7isideration.  A  negotiable  instrument  need 
not  state  that  any  value  was  given.  It  is  usual  to  insert  the  words 
"  for  value  received,"  but  this  is  not  necessary  to  its  validity,  and 
the  instrument  has  a  presumptive  consideration  without  the  use  of 
these  or  equivalent  words.  In  some  states  there  are  special  stat- 
utes requiring  that  the  consideration  shall  be  stated  in  negotiable 
instruments  given  for  patent  rights,  and  these  statutes  must  be 
observed.  An  instrument  is  not  rendered  nonnegotiable  merely 
because  it  states  the  consideration,  as,  for  instance,  if  it  reads, 
"In  payment  for  one  horse  I  promise  to  pay,  etc." 

2.  Date.  A  negotiable  instrument  need  not  be  dated.  If  it  is 
issued  undated,  the  true  date,  which  is  the  date  when  issued,  may 
be  inserted  by  any  holder.  The  insertion  of  a  wrong  date  binds 
prior  parties  in  favor  of  a  holder  who  afterwards  takes  the  instru- 
ment for  value  and  without  notice  of  the  error.  It  is  always  best 
to  date  a  negotiable  instrument,  in  order  to  avoid  difTicultics. 

3.  Place.  A  negotiable  instrument  need  not  state  the  place 
where  it  is  drawn  or  the  place  where  it  is  payable.  It  is,  of 
course,  best  to  insert  the  place  and  the  date,  but  these  are  not 
essentials. 

4.  Effect  of  seal.  A  sealed  instrument  is  generally  nonnego- 
tiable, but  the  seal  of  a  corporation  or  municipality  is  regarded  as 
part  of  the  signature  and  does  not  affect  the  negotiability  of  com- 
mercial paper  or  negotiable  bonds.    The  Negotiable  Instruments 


174  NEGCVriAHLl':  INSTRUMENTS  [Cu.  IX 

I^w  extends  this  doctrine  to  private  seals,  but  this  is  probably 
limited  to  the  case  where  there  is  merely  a  signature  followed  by 
a  seal,  and  might  not  extend  to  a  case  where  there  is  a  full  recital 
of  the  seal,  as  where  the  instrument  reads,  "In  witness  whereof, 
I  have  hereto  affixed  my  hand  and  seal."  Negotiable  bonds  are 
usually  sealed. 

101.  Effect  of  blanks.  If  an  instrument  is  issued  with  blanks, 
a  person  who  takes  it  lias  notice  that  it  is  to  be  filled  up,  and  is 
put  upon  inquiry  as  to  how  it  is  to  be  filled.  Any  holder  may  fill 
the  blanks  in  accordance  with  the  authority  given  ;  if  he  fills  them 
in  excess  of  that  authority,  he  cannot  recover  upon  the  instrument. 
But  if  he  fills  them  in  excess  of  the  authority  and  then  transfers 
the  completed  instrument  to  a  holder  for  value  and  without  notice, 
the  prior  parties  are  liable  to  such  holder.  It  is  better  that  one 
who  puts  out  an  incomplete  instrument  should  suffer  loss  than 
that  the  innocent  purchaser  should  suffer  it.  A  space  which  the 
writing  does  not  completely  fill,  as  the  space  for  the  amount,  is 
not  a  blank  if  sonictliijig  is  written  in  it. 

Examples  :  i.  A.  B.  indorses  C.  D.'s  note  with  the  amount  left  blank,  and 
authorizes  C.  D.  to  fill  it  up  for  an  amount  necessary  to  renew  another  note 
then  due;  this  amount  is  in  fact  $240.  C.  D.  fills  up  the  note  for  $1000  and 
discounts  it  at  a  bank  which  knows  nothing  of  these  facts.  A.  B.  is  liable  to 
the  bank  as  indorser  for  $1000. 

2.  A.  B.  draws  and  delivers  to  C.  D.  a  check  with  the  amount  left  blank, 
and  authorizes  C.  D.  to  write  in  an  amount  not  exceeding  $100.  C.  D.  writes 
in  $500  and  the  bank  pays  the  check.    A.  B.  must  suffer  the  loss. 

3.  A.  B.  draws  and  delivers  to  C.  D.  a  check  for  $2  upon  a  printed  form 

thus:   "Two Dollars."    C.  D.  writes  in  the  word 

'■  hundred  "  and  changes  the  figures  to  correspond  :   "  Two  hundred 

Dollars."  The  bank  pays  C.  D.  $200.  This  is  alteration,  not  filling  a  blank. 
The  loss  is  that  of  the  bank,  although  some  states  say  that  A.  B.  may  be 
estopped  to  set  up  the  alteration  if  he  has  by  his  negligent  manner  of  drawing 
the  check  "  invited  "  alterations.  The  general  rule  is  that  the  alteration  destroys 
the  instrument,  but  the  Negotiable  Instruments  Law  allows  a  holder  in  due 
course  to  recover  upon  it  for  the  original  amount,  and  under  this  law  the  bank 
could  charge  A.  B.'s  account  with  $2. 

102.  Delivery.  Ordinarily  a  negotiable  instrument  must  be 
delivered  in  order  to  be  valid.  As  between  immediate  parties, 
such  as  maker  and  payee,  indorser  and  indorsee,  this  rule  is  abso- 
lute ;    but   as   between   a   prior  party,   as   maker,   and   a   remote 


§103]  NEGOTIATION  175 

purchaser  for  value  without  notice,  a  vahd  dehvery  by  the  maker 
to  the  payee  is  conclusively  presumed  if  the  instrument  was 
completed  by  the   maker,    but  not  if   it  was  incomplete. 

Exatnples :  i.  A.  B.  makes  a  promissory  note  payable'  to  the  order  of 
C.  D.  and  leaves  it  on  his  desk.  C.  D.  takes  possession  of  it  without  A.  B.'s 
consent.    C.  D.  cannot  recover  against  A.  B.,  because  there  was  no  delivery. 

2.  In  the  above  case  C.  D.  indorses  the  note  and  transfers  it  to  E.  F.,  who 
is  a  holder  in  due  course.  E.  F.  may  recover  against  A.  B.  The  case  would 
be  the  same  if  A.  B.  locked  the  instrument  in  his  desk  or  safe  and  C.  D.  broke 
in  and  took  it.  It  is  especially  dangerous  to  keep  undelivered  completed 
instruments  payable  to  bearer,  because  any  thief,  by  getting  possession  of 
such  an  instrument,  could  give  good  title  to  it. 

3.  If  in  the  above  case  the  instrument  was  incomplete  in  some  respect,  and 
it  was  stolen,  completed  by  filling  blanks,  and  negotiated,  the  maker  would 
not  be  liable. 

III.    Negotiation 

103.  Negotiation;  indorsement;  delivery.  Negotiation  may  be 
by  indorsement  and  delivery,  or  by  delivery  alone,  according  as 
the  instrument  does  or  does  not  require  an  indorsement. 

1.  Negotiation.  An  instrument  is  negotiated  when  it  is  trans- 
ferred from  one  person  to  another  in  such  manner  as  to  constitute 
the  transferee  the  holder  thereof.  If  payable  to  bearer,  or  if  the 
last  indorsement  is  in  blank,  it  may  be  negotiated  by  delivery, 
the  same  as  money.  If  payable  to  order,  it  is  negotiated  by  the 
indorsement  of  the  holder,  followed  by  delivery.  An  indorsement 
without  the  words  "'  to  the  order  of  "  is  not  restrictive.  If  the 
body  of  the  instrument  is  in  terms  to  make  it  negotiable,  this 
negotiability  cannot  be  taken  away  by  the  mere  failure  to  repeat 
the  words  of  negotiability.  Indorsements  are  written  on  tlic  back  of 
the  instrument.  If  that  is  filled,  another  strip,  called  an  "  allonge," 
is  attached,  and  the  indorsements  arc  continued  upon  that. 

2.  Itidorsnncut.  Indorsements  may  be  either  special  or  in 
blank,  and  may  be  unqualified  or  qualified  or  restrictive. 

a.  A  special  indorsement  specifies  tin-  indorsee,  as  "  Pay  to 
E.  F.  A.  B."  This  could  not  again  be  negotiated  witinuii  k".  k'.'s 
indorsement. 

/;.  A  blank  indorsement  specifies  no  indorsee.  Tlu-  iiidorscr 
simply  writes  his  name  on  the  back  of  the  instriuiient,  and  il  tlien 


176  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

becomes  payable  to  bearer.  Any  holder  may,  however,  convert 
this  into  a  special  indorsement  by  writing  "'  Pay  to  (his  name)  " 
over  the  blank  indorsement. 

<-.  An  unqualified  or  unrestricted  indorsement  places  no  restric- 
tion upon  the  further  negotiation  of  the  instrument  or  upon  the 
indorser's  liability.  The  indorsements  given  above  are  unqualified 
and  unrestricted. 

d.  A  qualified  indorsement  simply  passes  title  without  render- 
ing the  indorser  liable  upon  the  paper.  The  form  used  for  this 
purpose  is  "without  recourse,"  written  above  the  indorser's  name. 
This  does  not  impair  the  negotiability  of  the  paper ;  it  simply 
exempts  this  indorser  from  liability  upon  it. 

e.  A  restrictive  indorsement  constitutes  the  indorsee  an  agent 
of  the  indorser,  usually  for  the  collection  of  the  paper.  The  form 
commonly  used  is  "  Pay  to  E.  F.  for  collection.  A.  B."  Other 
forms  are :  "  Pay  to  E.  F.  only.  A.  B."  ;  "'  Pay  to  the  X  Bank 
for  deposit  only."  This  indorsement  is  notice  that  A.  B.  owns  the 
paper,  and  practically  prohibits  further  negotiation  except  for  collec- 
tion purposes.  The  indorsee  may  receive  payment  or  may  transfer 
to  another  person  who  is  to  receive  payment,  but  there  cannot  sub- 
sequently be  a  holder  in  due  course  free  from  the  claims  of  A.  B. 

The  indorser  may  waive  presentment,  notice,  and  protest  by  so 
specifying  above  his  indorsement.  The  phrase  "waiving  protest" 
is  ordinarily  used  for  this  purpose.  This  waives  the  conditions  in 
his  contract  (see  sect.  1 10). 

A  transfer  without  indorsement  of  paper  payable  to  order  is  a 
mere  assignment  and  not  a  negotiation.  The  transferee  is  entitled, 
however,  to  have  the  indorsement  of  the  transferor,  and  negotia- 
tion takes  effect  from  the  time  he  secures  it. 

The  last  transferee  or  indorsee  is  the  holder.  He  may  be  a 
"holder  in  due  course"  or  "not  a  holder  in  due  course,"  and 
his  rights  may  depend  upon  his  position  in  this  respect. 

Examples  of  Indorsements 

[Refer  to  the  promissory  note  on  page  165.] 

Blank  indorsement :  Robert  H.  Moore  &  Co. 

Special  indorsement :         Pay  to  order  of  John  Spearing. 

Robert  H.  Moore  &  Co. 


§104]  NEGOTIATION  177 

Qualified  indorsement :       Without  recourse. 

Robert  H.  Moore  &  Co. 
or 
Pay  to  John  Spearing,  without  recourse. 
Robert  H.  Moore  &  Co. 

Restrictive  indorsement :   Pay  to  John  Spe.\ring  for  collection. 

Robert  H.  Moore  &  Co. 

Waiving  conditions  :  Waiving  protest. 

Robert  H.  Moore  &  Co. 
or 
Pay  to  John  Spearing,  waiving  protest. 
Robert  H.  Moore  &  Co. 

The  indorsee  may  indorse  to  another  and  he  to  another,  and  so  on. 

Successive  indorsements:  Pay  to  John  Spearing. 

Robert  H.  Moore  &  Co. 

Pay  to  Ralph  Le.\r. 

John  Spearing. 

Pay  to  Goldberg  &  Morton. 
Ralph  Lear. 

104.  Holder  in  due  course.  A  holder  in  due  course  is  a  holder 
who  takes  completed  and  regular  paper  before  maturity  in  good 
faith  and  for  value  and  without  notice  of  any  defects  or  defenses. 
He  is  often  called  a  ''  bo7ia  fide  holder  for  value  without  notice." 
The  phrase  "  holder  in  due  course  "  is  used  in  the  Negotiable 
Instruments  Law.  In  order  to  be  a  holder  in  due  course  a  trans- 
feree must  take  the  instrument  under  the  following  conditions. 

a.  The  instrument  must  be  complete  and  regular  upon  its  face. 
Any   blank,   any   erasure,   any   irregularity,    indicates  that  the 

paper  is  not  issued  in  the  usual  course  of  business,  is  not  in  con- 
formity with  business  u.sage,  and  the  holder  is  put  upon  inquiry 
by  this  fact.  As  to  what  appears  upon  the  face  of  the  paper, 
the  rule  is  caveat  emptor  (let  the  buyer  beware), 

b.  The  instrument  must  not  be  overdue. 

When  the  instrument  is  payable  at  a  fixed  time,  its  due  date  is 
certain.  A  transfer  on  the  day  of  maturity  is  before  the  instru- 
ment is  overdue. 

When  an  instrument  is  payable  on  demand,  it  is  due  a  rea.son- 
able  time  after  its  issue.    What  is  a  reasonable  time  is  a  (juestion 


178  NKGOriAlJLK  iNSrRUMENTS  L<^h.  IX 

of  fact  to  be  determined  by  the  nature  of  the  instrument,  the 
usages  of  trade,  and  the  facts  of  the  particular  case.  No  case 
shows  tliat  more  than  three  months  can  be  allowed,  and  some 
cases  have  held  three  months  to  be  too  long ;  some  states 
by  statute  sj)ccify  what  is  to  be  regarded  as  a  reasonable  time  in 
the  case  of  paper  payable  on  demand.  A  promissory  note  payable 
on  demand  is  due  without  regard  to  intermediate  negotiations,  but 
a  bill  of  exchange  payable  on  demand,  if  negotiated  at  reason- 
able inter\als,  is  due  within  a  reasonable  time  after  the  last 
negotiation. 

c.  The  holder  must  take  the  instrument  in  good  faith  and  for 
value. 

Bad  faith  may  be  gathered  from  circumstances,  as  where  an 
instrunjent  to  which  the  maker  has  a  good  personal  defense  is 
transferred  for  a  sum  so  out  of  proportion  to  its  face  value  as 
to  raise  a  suspicion  of  collusion.  Such  grossly  inadequate  con- 
sideration may  be  evidence  of  bad  faith  and  is  to  be  considered 
in  deciding  that  question  of  fact.  If  an  officer  of  a  corporation, 
authorized  to  draw  checks  of  the  corporation,  wrongfully  makes 
a  check  to  himself,  a  bank  receiving  this  check  is  charged  with 
notice  of  the  wrongdoing  because  of  the  suspicious  character  of 
the  transaction.  Taking  a  note  with  an  actual  suspicion  that  there 
is  some  defect  in  the  transferor's  title  is  taking  in  bad  faith  even 
if  full  value  be  given. 

Value  is  any  consideration  sufficient  to  support  a  common-law 
contract.  If  the  holder  suffers  any  detriment  in  taking  the  instru- 
ment, he  has  furnished  value.  The  disputed  question  has  been 
whether  the  taking  by  C  of  a  negotiable  instrument  made  by  A, 
and  owned  by  B,  as  collateral  security  for  an  antecedent  debt  due 
from  B  to  C  constitutes  C  a  holder  in  due  course.  New  York 
and  some  other  states  have  held  that  it  does  not,  while  the  United 
States  Supreme  Court  and  the  courts  of  many  states  have  held 
that  it  does.  The  Negotiable  Instruments  Law  sought  to  adopt  the 
rule  that  it  does,  but  the  language  used  was  held  by  a  New  York 
court  ineffective  for  this  purpose.  It  is  argued  that  C  suffers  no^ 
very  real  detriment  in  taking  the  instrument  merely  as  security 
for  an  antecedent  debt.  If  C  took  it  as  security  for  a  contem- 
poraneous debt,  or  in  payment  of  a  past  debt,  or  as  security  for 


§105]  NEGOTIATION  179 

a  binding  extension  of  time  upon  the  old  debt,  there  would  clearly 
be  a  detriment  to  C  sufficient  to  constitute  value. 

Example  i.  "New  York  City,  Jan.  5,  191 6.  Three  months  after  date  I 
promise  to  pay  to  the  order  of  B  one  hundred  dollars,  value  received.  A."  On 
February  10  B  indorses  and  delivers  the  above  instrument  to  C  as  collateral 
security  for  a  prior  debt  which  he  owed  to  C.  When  the  note  is  due,  C  sues  A 
upon  it  and  A  sets  up  that  B  procured  it  by  fraud.  If  C  is  a  holder  for  value  (and 
without  notice  of  the  fraud),  this  defense  is  not  good  against  him;  otherwise 
it  is  good.  Is  he  a  holder  for  value?  In  New  York  and  in  several  other  states 
it  is  held  that  he  is  not,  while  in  the  federal  courts  and  in  many  states  it  is 
held  that  he  is.  But  if  on  February  i  o  C  took  the  note  in  payment  of  a  past 
debt,  or  as  security  for  a  debt  then  contracted,  he  would  undoubtedly  be  a 
holder  for  value. 

d.  The  holder  must  not  at  the  time  of  the  negotiation  to  liim 
have  notice  of  any  infirmity  in  the  instrument  or  defect  in  the 
title  of  his  transferor. 

Notice  in  the  law  of  negotiable  instruments  means  actual  knowl- 
edge or  knowledge  of  such  facts  as  to  constitute  bad  faith.  It  is 
the  state  of  the  holder's  mind  that  is  important.  Negligence,  even 
gross  negligence,  is  not  notice,  although  it  may  be  evidence  of  bad 
faith.  The  question  is  not.  Would  an  ordinarily  prudent  man  in 
like  circumstances  have  had  notice  or  have  had  a  suspicion  of  some 
defect }  but.  Did  this  holder  have  notice  or  have  a  suspicion  .? 

The  tide  of  the  transferor  is  defective  when  he  obtains  the 
instrument  or  any  signature  thereto  by  fraud,  duress,  or  other 
unlawful  means,  or  for  an  illegal  consideration,  or  negotiates  it 
in  breach  of  faith  or  under  circumstances  amounting  to  fraud. 

c.  A  holder  who  derives  title  through  a  holder  in  due  course  is 
himself  a  holder  in  due  course,  even  though  he  does  not  comply 
with  the  ab(jve  requirements. 

Examp/e  2.  B  procures  from  C  a  negotiable  instrument  by  fraud.  B  nego- 
tiates it  to  D,  who  is  a  holder  in  due  course.  I)  negotiates  it  to  K,  who  has 
knowledge  of  the  fraud  (but  is  not  a  party  to  it).  K  is  a  holder  in  due  course 
with  all  the  rights  of  D.  This  rule  protects  D,  the  holder  in  due  course,  who 
otherwise  might  have  the  instrument  locked  up  in  his  hands  after  knowledge 
of  the  fraud  became  general.  But  if  D  negotiated  it  back  to  B,  the  latter 
would  not  be  a  holder  in  due  course,  because  he  was  a  party  to  the  fraud. 

105.  Rights  of  holder  in  due  course.  The  following  rules 
govern  the   rights  of  a  holder  in   due  course. 


ISO  NKGOriABLE  INSIRI'MKNTS  [Cii.  IX 

(7.  Tlie  holder  in  due  course  holds  the  instrument  free  from  all 
personal  defenses,  and  may  enforce  payment  for  the  full  amount 
against  all  parties  liable  upon  it ;  but  he  docs  not  hold  it  free 
from  the  absolute  defenses, 

(1)  Personal  defenses  are  fraud,  duress,  illegality  not  made 
an  absolute  defense  by  statute,  want  of  consideration,  release  of 
maker  or  other  party,  want  of  title  in  the  transferor,  etc. 

Examples  .•  i .  B  purloins  a  negotiable  instrument  payable  to  bearer  and 
negotiates  it  to  C,  a  holder  in  due  course.  C  may  recover  upon  it  and  may 
hold  it  even  against  the  true  owner.  It  is  in  the  latter  respect  on  the  same 
basis  as  stolen  money. 

2.  B  induces  A  by  a  false  representation  to  buy  a  horse,  and  A  gives  B  his 
promissory  note  for  5ioo.  B  negotiates  the  note  to  C,  a  holder  in  due  course. 
C  may  recover  the  full  amount.    A  cannot  set  up  B's  fraud  against  C. 

3.  B  gets  A  to  make  a  promissory  note  without  any  consideration  whatever. 
B  negotiates  it  to  C,  a  holder  for  value.    C  may  recover  from  A  upon  it. 

4.  A  anticipates  the  due  date  of  his  note  and  pays  B  in  full,  leaving  the 
note  in  B's  hands.  Before  it  is  due  B  negotiates  it  to  C,  a  holder  in  due 
course.    A  must  pay  it  again  to  C. 

(2)  Absolute  defenses  are  forgery,  alteration,  infancy,  illegality 
when  made  an  absolute  defense  by  statute,  want  of  execution  and 
delivery  as  and  for  a  negotiable  instrument,  etc. 

Examples  :  5.  A  gives  to  B  a  negotiable  instrument  for  a  gambling  debt. 
B  negotiates  it  to  C,  a  holder  in  due  course.  C  cannot  recover  upon  it  in 
those  states  which  by  statute  have  made  instruments  given  for  gambling  debts 
void.  (The  Negotiable  Instruments  Law  has  sought  to  change  the  rule  as  to 
such  absolute  defenses  as  statutory  illegality  in  gambling,  usury,  etc.,  and  some 
courts  have  given  effect  to  it  as  substantially  repealing  the  statutes  making 
such  instruments  void ;  but  at  present  it  is  unsafe  to  say  that  this  will  be  the 
general  result.) 

6.  A  is  asked  by  B  to  sign  a  lease.  By  a  trick  B  substitutes  a  negotiable 
promissory  note,  which  A  signs,  thinking  it  is  the  lease.  B  negotiates  the  note 
to  C,  a  holder  in  due  course.  C  cannot  recover  upon  it  unless  he  shows  that 
A  was  so  negligent  as  to  work  an  estoppel.  The  defense  is  absolute  unless  A 
is  estopped  by  his  own  negligence  to  set  it  up  against  an  innocent  holder. 
There  was  no  execution  and  delivery  as  and  for  a  negotiable  note. 

7.  A  gives  to  B  a  note  for  $10.  B  alters  it  to  read  $100  and  negotiates 
it  to  C,  a  holder  in  due  course.  C  cannot  recover  upon  it.  Alteration  is  an 
absolute  defense.  (The  Negotiable  Instruments  Law  has  now  provided  that 
C  may  recover  upon  it  according  to  its  original  tenor,  namely,  to  the  extent 
of  Sio.) 


p 


§§106,107]     MAKER'S  AND  ACCEPTOR'S  CONTRACT         i8i 

b.  Every  holder  is  deemed  presumptively  to  be  a  holder  in  due 
course.  But  when  fraud,  duress,  illegality,  or  defective  title  has 
been  proved  by  way  of  defense,  the  holder  must  then  show  by 
proof  that  he  gave  value,  and  must  show  the  circumstances  under 
which  he  took  the  instrument. 

Example  8.  C,  the  holder,  brings  an  action  against  A,  the  maker.  C  proves 
A's  signature,  introduces  the  note  in  evidence,  and  rests  his  case.  This  is  all 
the  proof  necessary,  as  there  is  presumption  of  consideration  and  presumption 
that  C  is  a  holder  in  due  course.  But  if  A  now  proves  that  the  note  was 
obtained  by  B  by  fraud  or  for  an  illegal  consideration,  then  C  must  prove  the 
value  he  gave  and  establish  good  faith  and  want  of  notice  by  proving  the 
circumstances  under  which  he  took  the  note. 

IV.    Maker's  and  Acceptor's  Contract 

106.  Maker's  contract  on  a  promissory  note.  The  maker  of  a 
promissory  note  contracts  that  he  will  pay  it  absolutely.  No  step 
is  necessar}^  to  fix  the  maker's  liability.  The  holder  need  not  for 
this  purpose  seek  the  maker  or  present  the  note  to  him.  If  it 
is  not  paid  at  maturity,  the  holder  may  at  once  bring  an  action 
against  the  maker  and  recover  from  him. 

lYesentment  to  the  maker  at  maturity  is  necessary  to  fix  the 
liability  of  an  indorser  but  not  to  fix  the  liability  of  the  maker 
himself. 

107.  Acceptor's  contract  on  a  bill  of  exchange.  An  acceptor's 
contract  is  absolute.  It  may  be  upon  the  bill  or  in  a  separate 
instrument.    Only  the  drawee  can  accept. 

r.  The  contract.  When  the  drawee  of  a  bill  of  exchange  ac- 
cepts it  by  wTiting  his  name,  usually  with  the  word  "Accepted," 
across  the  face  of  the  bill,  he  thereby  undertakes  that  he  will 
pay  the  bill  according  to  the  terms  of  his  acceptance.  lie  also 
admits  that  the  drawer's  signature  is  genuine  and  cannot  afterwards 
dispute  that  point.    An  acceptance  may  be  general  or  qualified. 

a.  If  the  acceptance  is  general  and  unqualified,  the  acceptor 
agrees  to  pay  according  to  the  tenor  of  the  bill ;  that  is,  he  assents 
fully  to  the  order  of  the  drawee.  He  is  then  liable  like  (be  maker 
of  a  promissory  note. 

/'.  If  the  acceptance  is  qualified,  the  acceptor  changes  the  tenor 
of  the  l)ill,  that  is,  does  not  assent  fully  to  the  ordrr  of  the  drawer. 


IS2  NK(UVl'l.\r.LK  INSTRUMENTS  [Cii.  IX 

An  acceptance  is  qualilicd  if  it  makes  payment  depend  upon 
any  condition,  or  is  for  only  a  part  of  the  amount  specified,  or 
changes  the  time  of  payment,  or  positively  changes  the  place  of 
payment.  Changing  the  place  of  payment  does  not  necessarily 
qualify  the  accepumce  so  long  as  the  new  place  is  not  made  the 
exclusive  place  of  payment.  "  An  acceptance  to  pay  at  a  partic- 
ular place  is  a  general  acceptance  unless  it  expressly  states  that 
the  bill  is  to  be  jjaid  there  only  and  not  elsewhere."  The  holder 
may.  refuse  to  take  a  qualified  acceptance  and  may  protest  the  b\\\ 
for  nonacceptance.  If  he  does  take  it,  he  releases  the  drawer  and 
prior  indorsers,  unless  they  also  assent  to  it  or  after  due  notice  of 
it  fail  to  dissent. 

Examples  : 
$500  New  York,  Feb.  27,  191 5 

Thirty  days  after  sight  pay  to  the  order  of  Foster  McKinnon  five  hundred 
dollars,  and  charge  to  the  account  of 

AuiERT  Howard 
To  John  Drury, 
Chicago 

1.  "Accepted,  March  7.  John  Drury."  This  is  a  general  acceptance. 
The  date  of  acceptance  should  be  added  to  fix  the  due  date,  since  the  bill  is 
payable  not  thirty  days  after  date,  but  thirty  days  after  sight.  It  is  due  thirty 
days  from  March  7,  namely,  on  April  6. 

2.  "Accepted,  March  7,  191 5,  payable  at  the  Franklin  National  Bank. 
JoHX  Drury."  This  is  still  a  general  acceptance,  although  it  specifies  a  place 
of  payment  and  to  that  extent  qualifies  the  bill.    Custom  has  permitted  this. 

3.  "Accepted,  March  7,  191 5;  payable  at  the  Franklin  National  Bank 
only.  John  Drury."  This  is  qualified.  It  positively  changes  the  place  of 
payment,  which  by  the  tenor  of  the  bill  would  be  at  the  drawee's  place  of 
business. 

4.  "Accepted,  March  7,  1915,  when  in  funds.  John  Drury."  This  is 
qualified.    There  is  a  condition  which  may  never  be  fulfilled. 

5.  "Accepted,  March  7,  1915,  for  $350.  John  Drury."  This  is  qualified. 
It  changes  the  amount. 

6.  "Accepted,  March  7,  1915,  payable  April  16,  1915.  John  Drury." 
This  is  qualified.  It  changes  the  time  of  payment  from  thirty  days  after  sight 
to  forty  days  after  sight. 

If  the  holder  takes  acceptance  3,  4,  5,  or  6,  he  releases  the  drawer  from 
liability  unless,  after  due  notice  of  the  kind  of  acceptance,  the  drawer  fails 
within  a  reasonable  time  to  dissent.  If  the  holder  will  not  take  these  accept- 
ances, he  must  protest  the  bill  and  give  the  drawer  due  notice  of  dishonor. 


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lS4  NKC^.O'I'IAHLK   INSTRUMENTS  [Cu.  IX 

2.  Accrptaticc  by  separate  zvriting.  Letter  of  credit.  The 
holder  is  entitled  to  have  the  drawee  accept  upon  the  bill  itself, 
and  may  treat  the  bill  as  dishonored  it'  he  refuses  to  do  so.  But 
an  acceptance  on  a  separate  sheet  of  paper  is  perfectly  valid  and 
binds  the  acceptor  in  favor  of  the  holder  and  all  who  afterwards 
take  the  bill  on  the  strength  of  such  acceptance.  Moreover,  there 
may  be  a  promise  in  writing  to  accept  a  bill  or  bills  thereafter  to 
be  drawn,  and  this  binds  the  acceptor  in  favor  of  all  who  take  the 
bill  or  bills  for  value  upon  the  faith  of  such  a  written  promise. 
A  letter  of  credit  issued  to  travelers  in  order  to  enable  them  to 
obtain  money  in  foreign  cities  is  merely  a  banker's  written  promise 
to  accept  bills  drawn  upon  him  up  to  a  certain  amount. 

Example.  B,  who  is  going  abroad,  buys  of  a  New  York  banker  a  letter 
of  credit  for  ^200.  Tlie  letter  names  B,  often  describes  him,  contains  his 
signature,  and  says  to  foreign  bankers  that  the  New  York  bank  will  accept 
bills  drawn  upon  it  by  B  up  to  ^200  if  each  bill  refers  to  the  New  York 
bank's  "  letter  of  credit  No.  — ."  Each  draft  so  cashed  by  a  foreign  bank  is 
entered  upon  the  letter  of  credit,  so  that  the  balance  undrawn  is  always  a 
simple  matter  of  computation.  The  foreign  banker  compares  B's  signature  on 
the  draft  with  the  signature  on  the  letter,  and  satisfies  himself  in  all  reasonable 
ways  that  the  person  drawing  the  bill  is  the  person  named  in  the  letter.  He 
then  discounts  the  bill  and  forwards  it  to  New  York  (or  it  may  be,  by  arrange- 
ment specified  in  the  bill,  to  London),  and  the  New  York  banker  is  bound  to 
pay  it,  because  he  has  promised  in  advance  to  do  so.  It  is  customary  for  New 
York  banks  to  agree  that  these  bills  shall  be  payable  at  some  London  bank, 
since  London  is  the  great  financial  clearing  house  for  the  whole  world. 

3.  WJio  may  accept.  No  one  but  the  drawee  named  in  the  bill 
can  accept  it.  But  there  are  two  exceptions  to  this  rule,  {a)  A  bill 
may  refer  to  a  secondary  person  to  whom  resort  shall  be  had  in 
case  the  bill  is  dishonored  by  the  first  drawee.  Such  a  person  is 
called  a  "referee  in  case  of  need,"  The  usual  form  is  to  write  below 
the  drawee's  name,  "  In  case  of  need  apply  to  G.  H."  It  is  in  the 
option  of  the  holder  to  resort  to  the  secondary  person,  {b)  When 
the  bill  has  been  dishonored  by  the  drawee,  any  person  can  accept 
it  for  the  honor  of  the  drawer  or  a  prior  indorser.  This  acceptance 
is  called  "  acceptance  supra  protest  for  honor."  Such  acceptor  be- 
comes liable  to  the  holder  upon  condition  that  the  bill  be  again 
presented  to  the  drawee  at  maturity  for  payment,  and  if  not  paid, 
that  it  be  protested  and  due  notice  given  to  the  acceptor  for  honor. 


§108]  MAKER'S  AND  ACCEPTOR'S  CONTRACT  185 

108.  Presentment  of  bill  of  exchange  for  acceptance.  Present- 
ment for  acceptance  is  for  the  purpose  of  ascertaining  whether 
the  drawee  intends  to  pay  the  bill  when  it  is  due.  Presentment 
may  be  necessary  or  it  may  be  optional  with  the  holder. 

1.  IV/icn  necessary.  When  a  bill  is  payable  after  sight,  it  must 
be  presented  for  acceptance  in  order  to  fix  its  maturity.  A  failure 
so  to  present  it  within  a  reasonable  time  after  it  is  issued,  or  after 
its  last  negotiation,  would  discharge  the  drawer  and  the  indorsers. 
A  bill  payable  at  a  day  certain  need  not  be  presented  for  accept- 
ance ;  it  is  enough  to  present  it  for  payment  when  that  day  arrives. 
Such  a  bill  may,  however,  be  presented  for  acceptance  before  its 
maturity,  if  the  holder  wishes  to  do  so.  The  drawee  is  allowed 
twenty-four  hours  to  decide  whether  to  accept ;  if  he  refuses  to 
return  the  bill  thereafter,  he  is  deemed  to  have  accepted. 

2.  I/ozv  and  zvJicn.  Presentment  to  the  drawee  for  acceptance 
must  be  by  or  on  behalf  of  the  holder  at  a  reasonable  hour  of  a 
business  day.  Presentment  cannot  be  on  holidays ;  if  Saturday  is 
not  otherwise  a  holiday,  presentment  for  acceptance  (but  not  for 
payment)  may  be  made  before  twelve  o'clock  noon  of  that  day. 
Presentment  of  a  bill  naming  two  or  more  drawees  must  be 
made  to  all,  unless  they  are  partners,  when  presentment  to  one  is 
sufficient.  Presentment  is  excused  if  the  drawee  is  dead  or  has 
absconded,  or  if  after  the  exercise  of  reasonable  diligence  he 
cannot  be  found. 

3.  Refusal  to  accept.  If  the  drawee  refuses  to  accept  the  bill, 
or  if  presentment  is  excused,  the  bill  is  said  to  be  dishonored. 
In  such  case  the  holder  must  give  due  notice  of  the  fact  to  the 
drawer  and  indorsers,  in  order  to  hold  them  liable  on  the  instru- 
ment ;  if  he  fails  to  do  so,  they  are  discharged.  If  the  bill  is  a 
foreign  bill,  the  holder  must  also  have  it  protested,  that  is,  pre- 
sented by  a  notary  public  and  certified  by  him  as  duly  presented 
and  dishonored. 

4.  Effect  of  acceptance.  If  the  drawee  accepts  the  bill,  (ho 
holder  retains  it  until  maturity  or  negotiates  it,  and  then  hi-  <>r 
the  new  holder  presents  it  again  for  payment.  If  it  is  not  then 
paid,  the  bill  is  dishonored  and  must  be  protested  and  due  notice 
given  to  the  drawer  and  indorsers.  A  failure  to  take  these  steps 
discharges  the  drawer  and  prior  indorsers. 


I86  NK(U)riAr.I,K   INSTRLuMKNTS  [cu.  IX 

V.  Dkawkr's  and  Indoksek's  Contract 

109.  Drawer's  contract  on  a  bill  of  exchange.  The  drawer's 
contract  is  conditional.  1  le  inidertakes  that  he  will  pay  the  bill 
on  these  conditions  :  (<?)  that  it  be  duly  presented  to  the  drawee 
for  acceptance  or  payment,  as  the  case  may  be  ;  {!>)  if  it  be  dis- 
honored, that  due  notice  of  that  fact  be  given  to  him  ;  (r)  if  a 
foreign  bill  be  dishonored,  that  it  be  also  duly  protested. 

These  conditions  are  strict,  and  in  order  to  hold  a  drawer 
they  must  be  strictly  complied  with  unless  a  recognized  excuse 
be  shown  for  not  doing  so.  The  steps  necessary  to  fulfill  these 
conditions  are  treated  in  sects,  iii-w^  post. 

110.  Indorser's  contract  on  a  bill  or  note.  The  indorser's  con- 
tract is  both  a  contract  of  assurance  of  payment  and  a  contract 
of  warranty.  One  who  negotiates  without  indorsement  also 
gives  certain  implied  warranties. 

1.  Contract  to  pay.  An  indorscr  by  an  unqualified  indorse- 
ment contracts  that  he  will  pay  the  bill  or  note  upon  these  con- 
ditions :  {a)  that  it  be  duly  presented  to  the  acceptor  or  maker 
for  payment  or,  if  necessary,  to  the  drawee  for  acceptance ; 
{p)  if  it  be  dishonored,  that  he  be  given  due  notice  of  that  fact ; 
(c)  if  it  be  a  foreign  bill,  that  it  be  duly  protested.  A  qualified 
indorser  ("  without  recourse  ")  does  not  undertake  any  contract 
to  pay,  but  he  does  undertake  a  contract  of  warranty. 

2.  Co7itract  of  warranty.  The  indorser  in  transferring  nego- 
tiable paper  also  impliedly  warrants  {a)  that  the  instrument  is 
genuine  and  in  all  respects  what  it  purports  to  be  ;  (/;)  that  he 
has  good  title  to  it ;  (r)  that  all  prior  parties  had  capacity  to 
contract ;  {d)  that  the  instrument  at  the  time  of  his  indorsement 
is  valid  and  subsisting.  An  indorser  by  qualified  indorsement,  or 
a  transferor  by  delivery  alone,  impliedly  makes  the  same  or  sub- 
stantially the  same  warranties.  The  sale  of  a  negotiable  instru- 
ment is  in  some  respects  like  the  sale  of  a  chattel  and  has 
warranties  accompanying  the  sale. 

Examples :  i.  B  by  delivery  without  any  indorsement  sells  to  C  a  note 
of  A  payable  to  bearer.  Unknown  to  either  party,  A's  name  is  forged.  C  may 
maintain  an  action  against  B  for  breach  of  the  implied  warranty  of  genuine 
ness.    The  same  result  would  follow  if  B  had  indorsed  "  without  recourse  "  or 


§110]  DRAWER'S  AND  INDORSER'S  CONTRACT  187 

had  made  an  unqualified  indorsement.    In  the  latter  case,  however,  he  would 
have  been  sued  upon  his  contract  to  pay. 

2.  In  the  above  case,  instead  of  forgery,  A  pleads  infancy  and  escapes 
liability.  B  is  liable  to  C  for  breach  of  the  warranty  that  prior  parties  had 
capacity  to  contract.  So  also  if  A  pleads  that  the  note  was  given  for  a 
gambling  debt  and  thus  escapes  liability,  B  is  liable  for  breach  of  the  war- 
ranty that  it  is  valid.  The  Negotiable  Instruments  Law,  however,  makes  a 
seller  by  delivery  or  by  qualified  indorsement  liable  in  such  case  only  if  he 
knows  the  instrument  is  invalid. 

3.  Order  of  indorscrs  liability.  If  there  are  several  indorsers 
upon  a  negotiable  instrument,  they  are,  as  among  themselves, 
presumptively  liable  in  the  order  in  which  they  indorse  ;  but  it 
may  be  shown  by  proof  that  they  agreed  otherwise. 

Examples :  3.  A  note  made  by  X  payable  to  A  is  indorsed  A,  B,  C,  D, 
and  is  in  the  hands  of  E.  E  presents  the  note  at  maturity  to  X,  who  refuses 
payment,  and  E  notifies  each  indorser.  E  may  sue  any  one  of  them.  Sup- 
pose he  recovers  from  C.  C  may  then  recover  from  either  A  or  B,  but  not 
from  D,  because,  had  D  paid,  he  could  have  recovered  from  the  prior  indorsers, 
of  whom  C  is  one.  If  C  recovers  from  B,  B  may  then  recover  from  A.  The 
only  recourse  of  A  is  against  X,  the  maker. 

4.  If  A,  B,  C,  and  D  are  shown  by  proof  to  have  agreed  to  become  joint 
indorsers,  then,  if  C  paid  E,  C  could  recover  one  fourth  of  the  payment  against 
A,  B,  and  D  respectively. 

4.  Irregular  indorser.  An  irregular  indorser  is  one  who 
indorses  before  the  payee,  and  generally  to  lend  his  credit  to 
the  maker,  although  it  may  be  to  lend  his  credit  to  the  payee. 
If  an  instrument  is  made  by  X  payable  to  the  order  of  A.  B., 
we  expect  to  sec  A.  B.'s  indorsement  first  in  the  list ;  if  we  find 
K.  F.'s  first,  we  call  E.  F.  an  irregular  indorser.  Under  the 
Negotiable  Instruments  Law  the  rule  is  that  if  E.  E.  indorses 
in  blank  before  delivery  to  A.  B.,  he  is  liable  to  A.  V>.  as 
indorser;  but  if  he  indorses  to  accommodate  A.  W.,  he  is  not 
liable  to  A.  B.,  although  he  is  liable  to  subsequent  holders.  Some 
states  hold  \\.  Y.  a  comaker,  and  .some  hold  him  a  guarantor 
for  the  maker;  but  the  prevailing  rule  is  that  stated. 

5.  Accommodation  indorser.  An  accommodation  indorser  is 
one  who  indorses  in  order  to  lend  his  credit  to  another  party 
to  the  instrument.  The  simplest  case  is  where  C.  I),  wishes  to 
borrow  money  at  a  bank  and  asks  A.  B.  to  lend  his  crecht.  In 
such   case   C.  D.  makes    a   promissory   note   jxiyable   to  A.   B.'s 


I88  NKCUrriAHLK  INSTRUMENTS  [Cii.  IX 

order,  A.  B,  indorses  it  in  blank,  and  C.  1).  diseounts  it  at  the 
bank.  Had  A.  B.  been  the  ordinary  payee,  he  would  have  owned 
the  note  and  discounted  it  himself.  Suppose  A.  B.  had  owned 
it,  but  the  bank  would  not  discount  it  on  A.  B.'s  and  C.  D.'s 
credit.  A.  B.  asks  E.  F.  to  lend  his  credit.  A,  B.  indorses  the 
note  in  blank,  E.  F.  then  indorses  it  in  blank,  and  A.  B.  dis- 
counts. E.  F.  is  the  accommodation  indorser  for  A.  B.,  the 
payee.  If  E.  F.'s  signature  appears  before  that  of  A.  B.,  he  is 
called  an  "  irregular  indorser." 

6.  Gnarantor.  A  guarantor  is  one  who  writes  a  guaranty 
upon  the  back  of  a  negotiable  instrument,  instead  of  an  ordi- 
nary indorsement.  His  contract  is  to  pay  if  the  maker  or  other 
prior  party  does  not,  without  any  condition  as  to  presentment 
or  notice.  There  has  been  some  question  whether  such  a  guar- 
anty is  negotiable,  that  is,  whether  it  will  pass  to  new  holders 
upon  the  negotiation  of  the  paper.  It  is  generally  held  not  to 
be  negotiable  ;  but  when  a  negotiable  insti'ument  with  a  general 
guaranty  written  upon  it  is  negotiated,  there  is  also  an  implied 
assignment  of  the  guaranty  to  the  new  holder. 

Exatnple  5.  X  makes  a  negotiable  note  payable  to  the  order  of  A.  B., 
who  writes  upon  the  back,  "  For  value  received,  I  hereby  guaranty  the  pay- 
ment of  the  within  note.  A.  B.,"  and  delivers  the  note  to  C.  D.  The  latter 
indorses  it,  "  Pay  to  E.  F.  C.  D.,"  and  delivers  it  to  E.  F.  At  maturity 
E.  F.  presents  it  to  X,  who  refuses  payment.  No  notice  is  given  to  A.  B. 
Some  jurisdictions  hold  that  the  guaranty  passed  by  implied  assignment 
with  the  negotiation  of  the  note  to  E.  F.,  and  E.  F.  may  recover  upon  it 
as  assignee  of  C.  D.,  and  no  notice  to  A.  B.  is  necessary.  Other  jurisdictions 
hold  that  the  guaranty  was  to  C.  D.  and  did  not  pass  to  E.  F.  upon  negotia- 
tion. The  better  way  for  C.  D.  is  to  take  an  indorsement  by  A.  B.  and  avoid 
these  questions.  If  C.  D.  wishes  to  escape  the  risks  of  presentment  and 
notice,  he  should  have  A.  B.  indorse  "  waiving  protest." 

111.  Presentment  for  payment.  The  first  condition  in  the 
drawer's  and  the  indorser's  contract  is  that  there  shall  be  due 
presentment  upon  the  maker  or  acceptor  for  payment.  Unless 
this  condition  is  met,  the  drawer  or  indorser  will  be  discharged 
from  all  liability  except  in  case  he  waives  the  condition  or 
some  allowable  excuse  be  shown  for  not  fulfilling  it.  We  have 
therefore  to  consider  how  and  when  presentment  is  to  be  made 
in  order  to  fulfill  this  condition. 


§111]  DRAWER'S  AND  INDORSER'S  CONTRACT  1S9 

1 .  Time  of  presentment.  If  the  instrument  is  payable  at  a 
fixed  time,  presentment  must  be  made  on  the  day  fixed. ^  If 
this  falls  on  Sunday  or  a  holiday  the  instrument  is  payable 
on  the  next  succeeding  business  day.  If  the  due  day  falls  on 
Saturday  the  Negotiable  Instruments  Law  provides  that  the 
instrument  is  to  be  presented  the  next  Monday,  unless  that  is 
a  holiday. 

If  the  instrument  is  payable  on  demand,  presentment  must 
be  made  within  a  reasonable  time  after  its  issue  or,  in  case  of 
bills  (not  checks),  a  reasonable  time  after  the  last  negotiation. 
Demand  instruments  may  be  presented  on  Saturday  up  to 
twelve  o'clock  noon,  unless  it  happens  to  be  wholly  a  holiday. 

Presentment  must  be  at  a  reasonable  hour  on  a  business  day. 
This  ordinarily  means  business  hours,  but  presentment  at  a 
residence  at  a   later  hour  may  be  justified   by  circumstances. 

In  computing  time  a  month  is  a  calendar  month.  Thus,  a  note  dated 
January  30,  due  one  month  from  date,  is  due  February  28  or,  in  leap  year, 
February  29.  If  dated  February  28  and  due  in  one  month,  it  would  be  due 
on  March  28.  In  computing  days  the  actual  time  is  taken.  A  note  dated 
October  13  and  due  in  ninety  days  is  due  January  11.  If  the  due  date  so  fixed 
is  a  holiday,  the  next  business  day  is  taken  as  the  due  date.  The  day  of  the 
date  is  excluded  in  both  cases.  A  note  dated  January  i  and  due  one  month 
from  date  is  not  due  January  31,  but  February  i.  A  note  dated  January  i  and 
due  thirty  days  from  date  is  due  January  31,  not  January  30. 

2.  Plaee  of  prcsentincnt.  Where  a  place  of  payment  is  speci- 
fied in  the  instrument,  presentment  must  be  at  that  place.  Where 
no  place  is  specified,  the  place  of  business  of  the  maker  or  accep- 
tor is  understood  or,  failing  that,  his  residence.  If  neither  can 
be  found,  then  presentment  may  be  made  to  the  maker  or  the 
acceptor  wherever  he  may  be,  or  at  his  last-known  place  of  busi- 
ness or  residence. 

Example  \.  A  note  is  made  "  payable  at  the  X  Bank."  Presentment  must 
be  made  at  the  bank.  Presentment  at  the  maker's  place  of  business  would  be 
ineffective.  The  note  is  equivalent  to  an  order  by  the  maker  to  the  bank 
to  pay  the  same  and  charge  against  his  deposit.  If  the  note  is  deposited  in 
the  bank  by  the  holder  and  is  there  on  the  day  of  maturity,  presentment 
is  complete. 

1  If  days  of  grace  arc  allowed,  three  days  must  bo  added  licfoii-  llu-  present- 
ment can  be  made.    We  shall  assume  that  days  of  grace  arc  abolished. 


190  NKGOTTAm^F.  INSTRUMENTS  [Cii.  IX 

3.  Mode  of  prcscntuiciit.  The  instrument  must  be  exhibited 
to  the  maker  or  acceptor  (or  drawee)  and  payment  demanded  ;  if 
it  is  paid,  it  must  be  delivered  up.  If  it  is  secured  by  collateral, 
this  also  must  be  delivered  u]x 

4.  To  li'honi  presented.  Tresenlment  of  a  note  is  made  to 
the  maker  or,  if  he  is  absent  from  the  place  or  inaccessible, 
to  any  person  found  in  charge  of  his  place  of  business.  Pre- 
sentment of  a  bill  is  made  to  the  drawee  for  acceptance  or 
to  the  acceptor  for  payment  in  the  same  way.  If  the  maker 
or  acceptor  is  dead,  presentment  may  be  made  to  his  personal 
representative  (executor  or  administrator).  If  an  instrument  is 
made  by  partners,  presentment  to  one  is  suflficient ;  but  if 
made  by  joint  parties  who  are  not  partners,  presentment  must 
be  to  all  of  them  before  the  instrument  can  be  deemed  to  be 
dishonored. 

5.  Excuse  for  delay.  If  circumstances  beyond  the  control  of  the 
holder  cause  a  delay  in  presentment  beyond  the  day  of  maturity, 
this  delay  will  be  excused  if  presentment  is  made  with  reasonable 
diligence  after  the  cause  of  delay  ceases  to  operate. 

Example  2.  H  in  New  York  holds  a  note  on  M  payable  in  Chicago.  He 
forwards  it  by  mail  in  due  season  to  his  agent  in  Chicago.  The  mail  train  is 
wrecked  and  the  mail  is  delayed  until  the  day  of  maturity  is  past.  The  note 
arrives  in  Chicago  two  days  after  maturity  and  is  promptly  presented.  The 
presentment  is  sufficient,  as  the  delay  is  excused. 

6.  Presentvicnt  dispensed  ivitJi.  If  after  due  diligence  the 
holder  cannot  make  any  presentment  upon  the  maker  or  acceptor, 
presentment  is  dispensed  with.  Such  would  be  the  case  if  the 
maker  could  not  be  found  in  any  place  of  business  or  residence. 
Due  diligence  requires  that  the  holder  make  proper  inquiries 
as  to  the  residence  of  the  maker. 

7.  Waiver  of  presentment.  The  indorser  may  waive  present- 
ment. This  is  often  done  by  writing  above  his  indorsement  the 
words  "waiving  presentment"  or  "waiving  protest."  But  the 
waiver  may  be  oral  and  may  be  made  at  any  time.  A  promise 
to  pay  after  he  is  discharged  for  nonpresentment,  if  made  with 
knowledge  of  the  fact,  will  constitute  a  waiver. 

8.  Effect  of  dislumor.  If  the  instrument,  after  presentment  to 
the  maker  or  acceptor  (or  drawee),  is  dishonored  by  nonpayment 


§112]  DRAWER'S  AND  INDORSER'S  CONTRACT  191 

(or  nonacceptance),  the  first  condition  in  the  drawer's  or  indorser's 
contract  has  been  fulfilled.  It  then  remains  for  the  holder  to  take 
the  next  step  and  give  due  notice  of  the  fact  and,  in  case  of  a 
foreign  bill,  have  due  protest  made. 

9.  Payment  for  Jionor.  Where  a  bill  has  been  protested  for  non- 
payment, any  person  may  intervene  and  pay  it  supra  protest  for 
the  honor  of  any  person  liable  thereon.  This  must  be  attested  by 
a  notarial  act  of  honor  founded  upon  the  declaration  of  the  payer 
as  to  his  intention  to  pay  the  bill  for  the  honor  of  the  person 
specified.  The  payer  then  pays  the  holder  and  takes  the  bill.  All 
parties  subsequent  to  the  one  for  whose  honor  he  paid  are  dis- 
charged, but  that  person  and  all  prior  persons  are  liable  to  the 
payer  for  honor. 

112.  Notice  of  dishonor.  The  second  condition  in  the  drawer's 
or  indorser's  contract  is  that  due  notice  shall  be  given  him  that 
the  primary  party  has  dishonored  the  instrument  by  refusing  to 
pay  it,  or  it  may  be,  in  the  case  of  a  bill,  by  refusing  to  accept  it. 
Failure  to  give  such  notice  will  discharge  the  drawer  or  indorser 
unless  he  has  waived  notice  or  unless  some  allowable  excuse  is 
shown  for  not  giving  it.  We  must  therefore  consider  what  con- 
stitutes due  notice. 

I.  By  whom  giirii.  The  holder  may  give  the  notice,  or  his 
agent  may  give  it,  or  a  notary  employed  by  him  may  give  it. 
A  notary  is  employed  to  present  the  instrument  whenever  it  is 
intended  to  protest  it,  and  the  notary  may  give  the  required 
notice  also. 

In  addition,  any  party  who,  by  getting  notice,  is  himself  liable 
to  the  holder  may  give  notice  to  a  prior  party  who  would  be 
liable  to  him. 

Example  i.  X  is  the  maker,  A,  B,  C,  D  are  indorsers,  and  H  is  holder, 
of  a  note.  H  presents  the  note  to  X,  who  refuses  payment.  H  gives  notice 
of  dishonor  to  C ;  C  gives  notice  of  dishonor  to  B ;  and  B  gives  notice  to  A. 
The  liability  of  A,  B,  and  C  is  fixed.  But  C  could  not  give  notice  to  D,  be- 
cause, if  C  paid  H,  C  could  not  recover  from  D.  The  notice  by  each  indorser 
to  his  prior  indorser  inures  to  the  benefit  of  the  holder,  who  could  sue  A  or 
B  or  C  as  he  might  choose.  Of  course  H  might  have  given  notice  to  all  four 
had  he  wished.  The  holder  may  chof)sc'  whirh  of  the  indorsers  he  will  give 
notice  to;  each  indorser  .so  notified  should  make  sure  that  his  prior  indonscrs 
have  also  been  notified  or  should  notify  them  himself. 


192  NKGOTlAJiLK   INSTKUMKNTS  [Ch.  IX 

2.  Form.  The  notice  may  be  written  or  oral.  It  is  sufficient 
if  it  identifies  the  instrument  and  indicates  that  it  has  been  dis- 
honored by  nonacceptance  or  nonpayment.  The  notice  may  be 
dehvered  personally  or  it  may  be  sent  by  mail.  When  notice  of 
dishonor  is  in  due  time  properly  addressed  and  stamped  and 
deposited  in  the  post  office  or  regular  letter  box,  the  sender  is 
deemed  to  have  given  due  notice,  notwithstanding  any  miscarriage 
in  the  mails. 

3.  Time  allowed.  If  the  person  giving  and  the  person  receiv- 
ing the  notice  reside  in  the  same  place,  personal  notice  must  be 
given  at  a  reasonable  hour  of  the  day  of  dishonor  or  of  the  day 
following,  and  a  notice  by  mail  must  be  deposited  in  the  post 
office  in  time  to  reach  the  addressee  in  the  usual  course  not  later 
than  the  day  following. 

If  the  person  giving  and  the  person  receiving  the  notice  reside 
in  different  places,  the  notice  should  be  deposited  in  the  post 
office  in  time  to  go  out  by  a  mail  not  later  than  the  day  follow- 
ing the  day  of  dishonor  or,  if  there  be  no  mail  at  a  convenient 
hour  of  that  day,  by  the  next  mail  thereafter.  Notice  in  this  case 
might  also  be  personal,  but  it  must  be  so  given  as  to  reach  the 
drawer  or  indorser  as  soon  as  if  sent  by  mail. 

Where  the  holder  gives  notice  to  an  indorser,  the  indorser  has, 
after  receipt  of  such  notice,  the  same  time  for  giving  notice  to  a 
prior  indorser. 

Example  2.  The  holder,  H,  resides  in  New  York ;  the  third  indorser,  C, 
resides  in  Chicago;  the  second  indorser,  B,  in  San  Francisco;  the  first  indorser, 
A,  in  New  York.  H  on  April  i  presents  the  note  and  it  is  dishonored ;  on 
April  2  H  mails  notice  to  C  which  is  received  by  him  in  Chicago  on  April  4 ; 
on  April  5  C  mails  notice  to  B  which  is  received  by  him  in  San  Francisco 
on  April  9:  on  April  10  B  mails  notice  to  A  which  is  received  by  him  in 
New  York  on  April  16.  Each  notice  is  duly  given,  and  the  liability  of  all 
indorsers  is  fixed.  If  H  had  notified  A,  the  notice  would  have  been  received 
by  A  on  April  2. 

4.  Place.  If  the  drawer  or  indorser  has  added  an  address  to 
his  signature,  notice  of  dishonor  must  be  sent  to  that  address.  If 
he  has  not  added  an  address,  then  notice  must  be  sent  either 
to  the  post  office  where  he  is  accustomed  to  receive  his  letters  or 
to  the  post  office  nearest  to  his  place  of  residence.  If  he  lives  in 
one  place  and  has  a  place  of  business  in  another,  notice  may  be 


§112]  DRAWER'S  AND  INDORSER'S  CONTRACT  193 

sent  to  either  place.  If  he  is  sojourning  in  another  place,  notice 
may  be  sent  to  that  place.  If  notice  is  actually  received  within 
the  time  allowed,  it  will  be  good,  though  it  may  have  been  sent 
to  the  wrong  place. 

Examples :  3.  The  indorser  lives  in  Boston  but  is  a  senator  and  sojourn- 
ing at  Washington.  Notice  may  be  sent  either  to  Boston  or  to  Washington. 
A  mere  temporary,  indefinite  visit  may  not  amount  to  sojourning. 

4.  The  indorser  hves  in  Montclair,  New  Jersey,  and  has  a  place  of  busi- 
ness in  New  York  City.    Notice  may  be  sent  to  either  place. 

5.  The  indorser  has  a  city  residence  in  New  York  City  and  a  summer  resi- 
dence at  Stockbridge.  Massachusetts.  Notice  should  ordinarily  be  sent  to  New 
York  City,  but  may  be  sent  to  Stockbridge  if  the  indorser  is  sojourning  there. 

5 .  Waiver  of  fiotice.  Notice  may  be  waived  by  draw'er  or  in- 
dorser. It  may  be  waived  orally  or  in  writing,  and  either  before 
or  after  the  time  for  it  has  arrived.  The  usual  method  is  to  write 
"  Waiving  notice  "  or  "  Waiving  protest  "  above  the  indorsement. 
The  phrase  "  Waiving  protest "  is  construed  to  cover  all  steps,  — 
presentment,  notice,  and  protest,  —  but  "Waiving  notice"  does  not 
dispense  with  presentment  or  protest.  The  indorsement  "Waiving 
protest "  makes  the  indorser  essentially  a  guarantor. 

6.  When  notice  is  excused.  Notice  is  excused  when,  after  the 
exercise  of  due  diligence,  it  cannot  be  given  or  when,  in  the  case 
of  notice  by  mail,  it  does  not  reach  the  addressee.  Due  diligence 
requires  that  suitable  inquiries  should  be  made  to  ascertain  the 
indorser's  address.  Merely  looking  in  a  directory  is  not  enough. 
Notice  need  not  be  given  to  a  drawer  who  has  no  right  to  expect 
that  the  drawee  would  accept  or  pay  the  bill,  as  where  he  draws 
upon  one  who  has  no  funds  of  his  and  has  made  no  agreement, 
expressed  or  implied,  to  honor  his  bills.  Notice  need  not  he 
given  to  an  indorser  for  whose  accommodation  the  instrument 
was  made  or  accepted. 

Example  0.  A  promissory  note  is  made  by  X  payable  to  the  order  of  B 
and  is  indorsed  by  B  and  discounted  by  B.  .\  signed  the  note  as  accommo- 
dation to  B  merely,  that  is.  loaned  B  his  credit  to  raise  money.  In  such  a  case 
B  is  not  entitled  to  notice  of  nonpayment,  because  it  is  B's  duty  to  provide  for 
payment,  and  not  X's. 

7.  Effect  of  failure  to  c^ve  ?iotice.  If  a  bill  is  j:)ri'scnlc(l  for 
acceptance,  and  acceptance  is  refu.scd,  a  failure  to  give-  tlu'  drawer 


194  NEGOT1A15LK  INSTRUMENTS  [Cn.  IX 

and  indorscrs  (if  any)  notice  of  this  fact  will  dischar^ijc  the  drawer  and 
indorsers  as  to  this  holder.  The  bill,  however,  is  not  yet  due,  and 
it  is  therefore  possible  for  the  holder  to  nef;otiate  it  to  a  holder  in 
due  course  who  does  not  know  that  it  has  been  dishonored  ;  as  to 
such  a  holder  the  drawer  and  indorsers  are  not  discharged. 

If  a  bill  or  note  is  j^resentcd  for  payment  and  is  dishonored, 
the  failure  to  give  notice  will  discharge  the  drawer  or  indorsers  as 
to  this  holder  and  all  subsequent  holders,  because  as  the  bill  or  note 
is  now  due  there  can  be  no  negotiation  to  a  holder  in  due  course, 
unless,  indeed,  it  be  at  a  later  hour  on  the  same  day  of  maturity. 

If  a  bill  has  been  dishonored  by  nonacceptance  and  due  notice 
given,  and  it  is  afterwards  presented  for  payment  and  dishonored, 
no  further  notice  need  be  given,  unless  the  bill  was  in  the  mean- 
time accepted. 

If  a  bill  has  been  dishonored  by  nonacceptance  and  no  notice 
given,  and  it  is  afterwards  negotiated  to  a  holder  in  due  course, 
the  latter  must  present  it  for  acceptance  or  payment  and  upon 
dishonor  give  due  notice. 

113.  Protest.  Protest  is  a  solemn  declaration  by  a  notary  in 
behalf  of  the  holder  against  any  loss  to  be  sustained  by  the  holder 
in  consequence  of  the  nonacceptance  or  nonpayment  of  a  bill 
or  note.  The  word  "protest"  signifies  "to  testify  before,"  and  a 
protest  is  therefore  testimony  before  or  in  the  presence  of  the 
notary  that  the  instrument  has  been  presented,  demand  for  accept- 
ance or  payment  made,  such  demand  refused,  and  the  instrument 
dishonored,  followed  by  a  formal  declaration,  or  "  protest,"  that 
any  loss  arising  therefrom  shall  be  borne  by  the  drawer  or  in- 
dorsers and  not  by  the  holder.  In  practice  the  notary  must  him- 
self make  the  presentment  and  demand,  in  order  that  he  may  have 
this  evidence  of  dishonor ;  he  cannot,  unless  statutes  so  provide, 
take  the  word  of  the  holder  or  any  other  person  as  to  these  facts, 
or  protest  an  instrument  on  hearsay  evidence.  In  case  a  notary 
cannot  be  found  to  make  such  protest,  it  may  be  made  by  any 
respectable  citizen  of  the  place  where  the  dishonor  occurs,  in  the 
presence  of  two  or  more  credible  witnesses. 

Protest  must  be  made  in  the  ca^e  of  foreign  bills  of  exchange, 
for  in  such  cases  the  notary's  certificate  is  the  only  admissible 
evidence  of  presentment,   demand,   and   dishonor.     Protest  may 


§113]  DRAWER'S  AND  INDORSER'S  CONTRACT  195 

be  made  in  the  case  of  other  negotiable  instruments,  and  the 
notary's  certificate  used  as  evidence,  but  protest  is  not  necessary, 
and  the  fact  of  dishonor  may  be  proved  by  the  oral  evidence  of  the 
person  making  presentment  and  demand.  It  is  now  usual  to  protest 
all  negotiable  instruments,  particularly  those  payable  at  a  bank.  In 
most  banks  some  clerk  is  a  notary,  and  if  at  the  close  of  business 
hours  his  examination  of  the  books  shows  that  the  maker  of  an 
instrument  has  not  funds  there  to  pay  it,  he  protests  the  instrument. 

Certificate  of  Protest 


XHniteb  States  of  Hmerica, ) 

)  00: 

state  of  «cv»  }?ork  ) 

BE  IT  KNOWN,  Thai  on  the  Z'l'^y,    _       day  ^_.l<?^rvvt. ,. 

in  the  year  of  our  Lord,  One  Thousand  Nine  hundred   -IrMAJLi'yV ,  at  the  request  of 

First  National  Bank  of  Ithaca,  N.  Y.,  /,  BES'JA.MIS  L.  JOHNSON,  Notary  Public  duly    Com- 
missioned and  Sworn,  duelling  in  the  City  of  ITHACA,  County  of  Tompkins,  and  Stale  aforesaid,  did 

present  the  original       .     ■>V»<C of W*l~wU_     fK-^J-CCXK^-vv/  for 

^/U**,  -Kaa/w^UjiX.  -^^ ■ :  ""TTTT     Dollars, 

hereunto  annexed,  at  the       \J!>A.flit    /UM".  UiR-  —    0*^i''-^-<^<^  --    where  the  same  is  payable, 

and  demanded  _-jCi/<kA^^'>'<''Jl^>JC    .  .     _ - _ which  was  refused. 

WHEREUPON,  /.  the  said  Notary,  at  the  request  aforesaid,  did  protest,  and  by   these  presents 

do  publicly  and  solemnly  protest,  as  well  against  the  Maker  and  Endorser  of  the  said  jy^MK' _.. 

as  against  all  others  whom  it  doth  or  may  concern,  for  exchange  or  re- 
exchange,  and  all  costs,  charges,  damages  and  interest,  already  incurred,  and  to  be  incurred  for  want  of 
_JaL.(^JLjrn^SLnrX of  the  same. 

And  I,  the  iaid  Notary,  do  hereby  certify,  that  on  the  same  day   and  year  above   written,    due 
notices  of  the  foregoing  fittest  uere  put  into  the  Post    Office  at  Ithaca,  postage  paid,  nr  served  as 
follous  : 
H,,,,;,     ^j\cJ\JI:lii..J}^*'^^.'-^Cij^ — o-crV     ditected     __  tt>vvA/v«^  ^  70    H- ... 

do  _^j7v«^.|be^.db«rw/ do    _.  7  aje&-^^,  (a..^|*^,'K) 

do  .  ■>co^Al^  3^/vft/^«.AA^    ^,         do      _  *7  ZJ-dUc.  }dr.f  a^t£-ILo«^,  Xj 

Each  of  the  above  named  places  being  the  repute  place  of  residence  of  the  person   to  whom    the 
notice  was  directed. 

IN  WITNESS  WHEREOF,  /  have  hereunto  subscribed  my  name  and 
.  X  affixed  my  .Seal  nfO/lur. 

I'Uol]  TO  N.ta.y/'ublic. 


196  NEGOTIABLE  INSTRUMENTS  [ch.  ix 

The  notary  also  usually  gives  the  necessary  notice  of  dishonor 
to  the  drawer  or  indorscrs,  but  this  may  be  done  by  the  holder  or 
by  any  other  agent  of  his.  If  the  notary  gives  such  notices,  he 
may  include  a  statement  to  that  effect  in  his  certificate.  Practice 
in  that  respect  varies.  If  the  statement  that  notices  have  been 
duly  given  is  not  included  in  the  certificate,  that  fact  would  have 
to  be  proved  at  a  trial  by  the  oral  evidence  of  the  notary  or  other 
person  who  gave  them. 

When  protest  has  been  made,  the  notary  prepares  a  certificate 
under  his  hand  and  seal  setting  forth  (a)  the  time  and  place  of 
presentment ;  (d)  the  fact  that  presentment  was  made  and  the 
manner  thereof ;  (c)  the  demand  rnade  and  the  answer  given,  or 
the  fact  that  the  drawee,  acceptor,  or  maker  could  not  be  found  ; 
(c/)  the  cause  or  reason  for  protesting  the  instrument.  This  certifi- 
cate is  annexed  to  the  instrument  protested,  or  to  a  copy  thereof, 
and  is  handed  to  the  holder  of  the  instrument  as  his  evidence  of 
presentment,  demand,  and  dishonor.  It  may  also,  of  course,  contain 
evidence  that  notices  were  duly  sent  to  the  drawer  or  indorsers. 

rROTESTKD    PrOMISSOKV    NoTK 


■^c-^-^fct,  |L  ^w*— 


jfiSlOAi 


Ut:^ 


TY^ 


FIRST  NA^TIONAL.  BANK.  ITHACA. N.Y.  j 


The  protest  must  be  at  the  place  where  the  instrument  is  dis- 
honored and  on  the  day  of  the  dishonor.  But  it  is  not  essential 
that  the  certificate  should  be  made  on  that  day.  Protest  itself 
may  be  sufficiently  indicated  by  a  "  noting  "  on  the  bill  or  note 
in  very  brief  form,  thus :  ""  Payment  demanded  and  refused, 
2^  April,  191 5.  B.  L.  J.  Fees  75  <^.."  This  means  that  on  that 
date  the  notary  whose  initials  are  written  made  due  presentment 
and  demand,  that  the  instrument  was  dishonored  and  protested, 


§113]  DRAWER'S  AND  INDORSER'S  CONTRACT  197 

and  that  the  notan''s  charges  are  75  cents.  The  notary  may  at 
any  subsequent  date  "'  extend "  the  protest  by  making  out  his 
formal  certificate. 

The  costs  of  protest  are  added  to  the  amount  to  be  paid  by  any 
party  Hable  on  the  instrument.  These  fees  are  fi.xed  by  statute 
and  include  so  much  for  protest  and  so  much  for  each  notice  of 
dishonor.  There  is  also  added  interest  from  the  time  the  instru- 
ment was  due  until  the  drawer  or  prior  party  pays  it  to  the  holder. 

Notice  of  Dishonor 


IthiKa,  N.  v., QM^y^.-.^'l. I9i5* 


SIR- 
TAKE  XOTICE,  that  a yS-P^.. 


yvs^'qiJjU by    S^on^^-^^r^  7H^  

For  $S'.9V.=^. _ 

Dated...H-<MV.  r2'7^  ./^V.:^ 

Payable       iXsJ^JUr^    T'VV/O^^t^VP. afu-r  date. 

at M%XL     V^r^S^iX  ..SxTiosAU  Bank,  of  Ithaca, 

and  cndorsefl  Ijy  you.  was  this  day  Pkotksteo  for  non-payment 
and  that  the  holders  look  to  y<ju  for  the  payment  tliereof,  payment 
having  been  demanded  and  refused. 

Yours  rcs])eetful!y, 


(uj?^w^.    ^.    H-<>t.^vNXi.<rw^ 


Notary  Public. 

'o..4iiP^^}>'^.J^  


198  NFXIcrriAlU.K  INSTRUMENTS  [Cu.  IX 

In  case  of  a  foreign  bill  the  holder  may  recover  the  cost  of 
reexchange.  This  is  measured  by  the  sum  for  which  a  sight  draft 
must  be  drawn  on  the  drawer  of  the  dishonored  bill,  in  order  to 
reaHze  immediately  the  amount  of  the  dishonored  bill  i)lus  the 
cost  of  protest. 

Example.  D  in  London  draws  a  bill  for  Si 000  on  E  in  New  York,  and 
it  is  transferred  to  H  in  New  York,  who  presents  it  for  payment.  It  is  dis- 
honored and  the  protest  fees  amount  to  $1.25.  It  is  obvious  that  D  now  owes 
H  on  that  day  $1001.25.  II  may  draw  a  sight  draft  on  D  for  such  a  sum  as 
at  the  ruling  rate  of  exchange  between  New  York  and  London  will  realize  in 
New  York  $1001.25.  The  difference  between  that  sum  (say  $1081.35,  Ameri- 
can money)  and  the  sum  realized  ($1001.25)  is  the  cost  of  reexchange  which 
must  be  borne  by  D. 

In  the  United  States  the  matter  of  reexchange  has  been  simpli- 
fied by  statutes  which  fix  a  definite  percentage  on  a  foreign  bill 
to  be  recovered  in  lieu  of  reexchange.  This  varies  in  different 
states,  but  the  amount  is  from  10  per  cent  upward. 

114.  Checks.  The  contract  of  the  drawer  of  a  check  is  different 
from  that  of  the  drawer  of  an  ordinary  bill  of  exchange  so  far  as 
concerns  presentment  and  acceptance. 

I.  Presentment.  A  check  must  be  presented  for  payment 
within  a  reasonable  time  after  its  issue,  or  the  drawer  will  be  dis- 
charged from  liability  thereon  to  tlie  extent  of  the  loss  caused  by 
the  delay.  If  he  is  not  damaged  at  all,  he  will  not  be  discharged, 
no  matter  how  long  the  delay. 

Example.  B  draws  a  check  for  $100  and  delivers  it  to  C,  who  keeps  it  six 
months.  In  the  meantime  the  bank  fails.  When  it  failed,  B  had  more  than 
$100  on  deposit.  The  bank  pays  40  per  cent  to  depositors.  C  may  recover 
from  B  $40  on  the  check,  but  not  the  other  $60,  because  B  is  damaged  to 
that  extent  by  C's  delay.  Had  this  been  a  bill  of  exchange  payable  on  demand, 
B  would  have  been  discharged  altogether  by  C's  unreasonable  delay. 

A  reasonable  time  for  the  presentment  of  a  check  is  much 
shorter  than  that  for  the  presentment  of  a  bill  and  cannot  be 
prolonged  by  negotiation.  If  the  holder  and  the  bank  are  in  the 
same  place,  the  check  should  be  presented  before  the  close  of 
banking  hours  on  the  next  business  day  following  the  day  of  its 
issue.  If  the  holder  resides  in  a  different  place,  the  check  should 
be  started,   not   later  than   the   day   following   its   delivery,   by  a 


§115]  DRAWER'S  AND  INDORSER'S  CONTRACT  199 

reasonably  direct  route  to  the  place  where  the  bank  is  located. 
The  sending  of  checks  by  indirect  routes  through  various  corre- 
spondent banks  has  been  held  in  some  states  to  constitute 
unreasonable  delay  in  presentment. 

2.  Certification.  If  the  holder  of  a  check  procures  it  to  be 
certified,  the  drawer  and  indorsers  (if  any)  are  discharged  from 
further  liability.  This  is  because  when  a  holder  takes  the  check 
to  the  bank  to  be  certified  he  is  entitled  to  the  money  and  elects 
to  take  the  promise  of  the  bank  in  place  of  it.  But  if  the  drawer 
procures  it  to  be  certified  before  delivery  to  the  payee,  the  latter 
takes  the  check  with  the  same  effect  as  an  accepted  bill  of  ex- 
change. When  a  check  is  certified  the  bank  immediately  charges 
up  the  check  to  the  depositor's  account  so  as  to  preserve  a  fund 
from  which  to  pay  the  check. 

3.  Rights  of  holder  of  check.  A  holder  of  an  uncertified  check 
has,  ordinarily,  no  rights  against  the  bank  upon  which  it  is  drawn, 
even  though  the  drawer  has  funds  enough  there  to  pay  it.  The 
promise  of  a  bank  to  honor  the  checks  of  a  depositor  runs  to  the 
depositor  only,  and  the  payee  of  the  check  cannot  sue  the  bank, 
any  more  than  the  payee  of  a  bill  of  exchange  can  sue  the  drawee 
before  acceptance.  The  sole  right  of  the  payee  is  to  present  the 
check  promptly  and,  in  case  it  is  dishonored,  give  the  drawer  due 
notice,  and  thereafter  sue  the  drawer. 

4.  Rights  of  drawer  against  bank.  If  a  bank  wrongfully  dis- 
honors a  depositor's  check,  the  depositor  has  an  action  against  the 
bank  for  the  injury  to  his  credit.  If  he  is  a  business  man  the 
damage  to  credit  is  presumed  to  follow  such  dishonor,  and  he  may 
recover  a  substantial  sum  in  the  discretion  of  the  jury. 

115.  Position  of  indorser  after  liability  is  fixed.  After  the 
necessary  steps  have  been  taken  t(j  fix  an  indorscr's  liability  (or 
without  such  steps  if  he  has  waived  them),  the  indorser's  posi- 
tion is  essentially  that  of  a  guarantor.  His  rights  and  remedies 
are  those  already  discussed  under  the  head  of  Guaranty  (sec 
sects.  91-93  ante). 

If  an  indorser  pays  an  instrument  upon  which  he  is  liable,  he  is 
entitled  to  the  possession  of  the  instrument  and  may  proceed  upon 
it  against  all  prior  parties.  He  may  strike  out  his  own  and  all  sub- 
sequent indorsements,  and  again  transfer  the  paper  if  he  wishes. 


200  NFXKTriAP.LK  INSTRUMENTS  [Cu.  IX 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  94.  In  what  sense  is  a  negotiable  instrument  an  instrument  of 
credit?  In  wliat  sense  an  instrument  of  trade?  Illustrate  methods  of  payment. 
What  are  the  principal  kinds  of  negotiable  instruments  ?  Explain  the  use  of 
a  bill  of  exchange.  Distinguish  inland  and  foreign  bills.  Is  a  check  a  bill  of 
exchange?  Name  different  kinds  of  promissory  notes.  Are  bills  of  lading  and 
warehouse  receipts  negotiable  ? 

95.  What  are  the  three  characteristics  of  negotiable  instruments?  Explain 
each.  Are  there  three  days  of  grace  in  your  state  ?  What  distinguishes  nego- 
tiation from  assignment?    Illustrate. 

96.  Define  bill  of  exchange.  Name  the  parties  in  a  bill  of  exchange. 
What  is  acceptance?  How  is  a  bill  transferred?  What  is  a  bill  in  a  set? 
What  two  different  purposes  does  a  bill  in  a  set  serve?  Define  promissory 
note.  What  is  the  effect  of  stating  a  place  of  payment?  Is  it  necessary? 
Explain  discount.  What  is  a  certificate  of  deposit?  What  is  a  check?  What 
is  a  certified  check?  What  is  a  cashier's  check  and  what  is  it  used  for?  What 
is  a  cashier's  bill  of  exchange?  What  is  a  bond?  When  is  it  negotiable? 
What  is  a  coupon  bond? 

97.  What  is  the  Negotiable  Instruments  Law?  Where  is  it  in  force? 
What  is  its  effect? 

98.  State  the  five  essentials  of  a  negotiable  instrument.  How  should  a 
negotiable  instrument  be  signed  by  A.  B.  if  he  is  agent  for  C.  D.  and  if  he 
is  treasurer  of  the  X  Y  corporation  ? 

Problem  i.  A  promissory  note  is  signed  "A.  B.,  President;  C.  D.,  Treas- 
urer." It  reads,  "  We  promise  to  pay,  etc."  Across  the  end  is  printed, 
"  X  Y  Co."  The  note  has  been  transferred  to  a  holder  in  due  course,  who 
sues  A.  B.  and  C.  D.  personally.  They  set  up  that  it  is  the  note  of  the  X  Y 
Co.    Result? 

Problem  2.  "I,  A.  B.,  promise  to  pay  to  the  order  of  C.  D.  one  hundred 
dollars  on  July  i."  Action  is  brought  against  A.  B.  upon  a  promissory  note. 
Result  ? 

Problem  J.  A  check  on  a  savings  bank  reads:  "  X  Y  Savings  Bank.  Pay 
to  A.  B.  or  order  one  hundred  dollars  and  charge  to  my  account,  No.  25.  C.  D." 
Underneath  is  printed,  "  The  bank  book  of  the  depositor  must  accompany  this 
order."    Is  this  negotiable  ? 

Problem  4.  "  I  promise  to  pay  to  the  order  of  A.  B.  one  hundred  dollars 
and  also  one  half  the  net  profits  of  the  sale  of  our  crop  of  oats.  C.  D."  Is 
this  negotiable? 

Problem  5.  "  I  promise  to  pay  to  the  order  of  A.  B.  one  hundred  dollars  on 
July  I,  with  interest  at  6  per  cent,  or  10  per  cent  if  not  paid  at  maturity,  and 
with  costs  of  collection  if  not  paid  at  maturity.    C.  D."    Is  this  negotiable? 


REVIEW  QUESTIONS  AND  PROBLEMS  201 

Problem  6.  "  I  promise  to  pay  to  the  order  of  A.  B.  one  thousand  dollars 
within  one  year  after  he  is  married.    C.  D."    Is  this  negotiable? 

Problem  7.  "  I  promise  to  pay  to  the  order  of  A.  B.  five  hundred  dollars 
ninety  days  after  the  dissolution  of  the  partnership  between  him  and  me.  C.  D." 
Is  this  negotiable  ? 

Problem  8.  B's  clerk  made  out  checks  to  fictitious  persons  and  B  signed 
them,  thinking  they  were  for  persons  who  had  dealings  with  his  concern.  The 
clerk  indorsed  the  fictitious  names,  obtained  the  money,  and  absconded.  The 
bank  charged  tlie  checks  to  B's  account.  B  claims  they  should  not  be  charged 
to  him  and  that  the  bank  should  stand  the  loss.    Which  is  right.'' 

99.  What  must  a  negotiable  instrument  not  contain  ?  State  the  exceptions 
to  this  rule. 

Problem  g.  "  I  promise  to  pay  to  A.  B.  or  order  one  hundred  dollars,  or 
at  my  election  deliver  to  him  one  share  of  stock  in  the  X  Y  Co.  C.  D."  Is 
this  negotiable? 

100.  Need  a  negotiable  instrument  state  the  consideration  ?  Why?  What 
is  the  effect  of  issuing  a  negotiable  instrument  undated  ?  without  a  place  of 
issue  or  payment?    What  is  the  effect  of  adding  a  seal? 

101.  When  a  note  is  issued  with  blanks,  state  what  may  be  done  as  to  filling 
them.    How  if  it  is  issued  without  a  blank  but  with  a  partly  filled  space? 

Problem  10.  A  note  made  by  X  and  indorsed  by  A  is  issued  June  10, 
but  without  any  date  expressed,  and  is  payable  "one  month  after  date."  It 
is  transferred  to  B,  who  inserts  the  date  June  i  and  transfers  it  to  C.  It  is 
presented  July  i,  and  on  dishonor  due  notice  is  given  to  A  and  B.  Are 
they  liable  ? 

102.  Is  delivery  necessary  ?  When  is  it  conclusively  presumed  ?  When 
not?    Illustrate. 

Problem  11.  C.  D.  writes  his  name  on  a  blank  piece  of  paper  to  verify  his 
signature.  A.  B.  writes  above  the  signature  a  promissory  note  for  fifty  dollars 
payable  to  his  order,  indorses  it,  and  transfers  it  to  E.  F.,  who  is  a  bona  Jitle 
holder  for  value.    Is  C.  D.  liable  to  E.  F.  ? 

103.  What  is  negotiation?  How  is  it  accomplished?  What  is  a  blank  in- 
dorsement? a  special  indorsement?  an  unqualified  indorsement?  a  qualified 
indorsement?  a  restrictive  indorsement?  an  indorsement  waiving  conditions? 
When  is  a  transfer  a  mere  assignment?    Who  is  the  holder? 

Problem  12.  A  note  is  payable  to  the  order  of  A.  B.,  who  transfers  it  to 
v..  Y .  without  any  indorsement.    What  is  the  position  of  E.  F.  ? 

Problem  rj.  A  note  payable  to  A.  B.  or  order  is  indorsed,  "  Pay  to  E.  V. 
for  collection.  A.  B."  E.  F.  then  indorses  it,  "  Pay  to  G.  H.  i:.  F."  (;.  II. 
collects  the  money  from  the  maker.    Whose  money  is  it  ? 

Problem  14.  A  note  payable  to  the  order  of  A.  B.  is  indorsed,  "  Without 
recourse.    A.  B."  and   transferred   to    E.  F.     The  maker  is  insolvent,  and 


202  NEGOTIABLE  INSTRUMENTS  [Ch.  IX 

after  due  presentment  to  the  maker  and  notice  to  A.  B.,  E.  F.  sues  A.  B. 
Result  ? 

104.  Who  is  a  liolder  in  due  course?  State  essentials.  When  is  an  instru- 
ment payable  on  demand  overdue?  What  is  bad  faith?  What  is  value?  When 
is  an  antecedent  debt  value?  What  is  notice  of  defenses  or  defects?  State  a 
case  where  a  holder  with  notice  is  a  holder  in  due  course. 

Problem  /j.  A  note  payable  to  order  of  A.  B.  on  demand  is  transferred 
by  him  to  E.  F.  six  months  after  it  was  first  issued.  E.  F.  sues  the  maker, 
who  sets  up  failure  of  consideration,  a  defense  good  against  A.  B.  Is  it  good 
against  E.  F.  ? 

105.  What  defenses  are  not  good  against  a  holder  in  due  course?  What 
are  good?  Illustrate.  What  presumption  in  favor  of  a  holder?  How  is  it 
overcome,  and  what  then  must  the  holder  show  ? 

Problem  i6.  C.  D.  in  New  York  gives  A.  B.  a  note  payable  to  his  order 
for  $ioo  upon  A.  B.'s  false  representation  that  he  has  worked  two  months  for 
C.  D.  upon  the  latter's  Kansas  farm.  In  fact  A.  B.  has  never  worked  for  C.  D. 
at  all.  A.  B.  at  once  indorses  the  note  for  value  to  E.  F.,  who  does  not  know 
the  above  facts.    Is  C.  D.  liable  to  E.  F.  on  the  note  ? 

Problem  ly.  C.  D.  borrows  $ioo  of  A.  B.,  gives  him  a  negotiable  note  for 
$100  at  6  per  cent  interest  and  also  a  bonus  of  $5.  A.  B.  before  maturity 
transfers  the  note  to  E.  F.  for  value  and  without  notice.  Is  C.  D.  liable  to 
E.  F.  on  the  note? 

106.  State  the  maker's  contract.  Is  it  absolute  or  conditional?  When  is 
presentment  to  the  maker  at  maturity  necessary?    When  not? 

Problefn  j8.  A  note  is  payable  "  on  demand  at  the  X  Bank."  Is  it  neces- 
sary to  present  it  at  the  X  Bank  before  bringing  an  action  against  the  maker? 

107.  What  is  the  acceptor's  contract?  What  does  he,  admit?  What  is  a 
general  acceptance?  What  is  a  qualified  acceptance?  Must  the  holder  take  it? 
Result  of  taking  it  ?  Effect  of  specifying  a  place  of  payment  ?  Effect  of  accept- 
ance on  separate  paper?  Must  the  holder  take  such  acceptance?  What  is  a 
letter  of  credit?    Who  may  accept  bills ?    State  exceptions. 

Problem  ig.  "  To  C.  D.  :  Pay  to  order  of  A.  B.  one  hundred  dollars  ten 
days  after  sight.  E.  F."  A.  B.  indorses  to  G.  H.,  who  presents  it  to  C.  D.  The 
latter  writes,  "  Accepted,  April  4,  191  5.  C.  D."  G.  H.  sues  C.  D.  The  latter 
sets  up  that  A.  B.  forged  E.  F.'s  signature.  Is  this  a  good  defense  against 
G.  H.,  who  is  a  holder  in  due  course? 

Problem  20.  The  drawee  accepts  a  bill  as  follows  :  "  Payable  when  in  funds. 
C.  D."  The  holder  presents  it  for  payment  at  maturity  and  the  acceptor 
refuses  to  pay.  Due  notice  is  given  the  drawer.  Is  the  acceptor  liable  to  the 
holder?    Is  the  drawer? 

108.  In  what  cases  must  a  bill  be  presented  for  acceptance?  When  is  it 
optional?   Effect  if  drawee  keeps  and  refuses  to  return  the  bill?   On  what  days 


REVIEW  QUESTIONS  AND  PROBLEMS  203 

may  presentment  for  acceptance  be  made?  When  is  it  excused?  If  drawee 
refused  to  accept,  what  should  the  holder  do?  What  results  if  he  does  not  take 
these  steps  ?    What  results  if  the  bill  is  accepted  ?  ^ 

Problem  21.  A  bill  payable  ten  days  after  sight  is  issued  January  8,  1914, 
is  indorsed  to  A  February  6,  and  is  presented  to  the  drawee  for  acceptance 
August  5.  The  drawee  refuses  to  accept.  A  protests  the  bill  and  duly  notifies 
the  drawer.    Is  the  drawer  liable  to  A? 

109.  What  is  the  drawer's  contract?  State  the  conditions.  Effect  of  failure 
to  fulfill  them  ? 

110.  What  is  an  indorser's  contract  as  to  payment?  What  warranties  does 
he  make  ?  What  is  the  order  of  the  indorsers'  liability  ?  Who  is  an  irregular 
indorser?  What  is  his  contract?  Who  is  an  accommodation  indorser?  Illus- 
trate.   Who  is  a  guarantor ?    Is  the  guaranty  negotiable? 

111.  When  is  a  presentment  for  payment  made?  How  is  time  computed? 
What  if  the  due  date  falls  on  a  holiday?  on  Saturday?  When  is  an  instru- 
ment payable  on  demand  due  ?  At  what  place  must  presentment  for  payment 
be  made?  State  the  mode  of  presentment.  To  whom  is  presentment  made? 
What  will  excuse  delay  in  presentment?  When  is  it  excused  altogether?  What 
is  waiver?  If  the  instrument  is  dishonored,  what  is  the  effect?  What  is  pay- 
ment for  honor  ? 

Problem  22.  A  note  falls  due  on  Saturday.  The  holder  presents  it  to  the 
maker  on  that  day.  It  is  not  paid.  The  holder  duly  notifies  the  indorser.  Is 
the  indorser  now  liable  to  the  holder  ? 

Problem  2j.  A  note  is  payable  at  "  114  South  Main  Street,  St.  Louis." 
It  is  presented  at  another  place  of  business  of  the  maker  in  St.  Louis,  and 
on  dishonor  due  notice  is  given  to  the  indorser.  Is  the  indorser's  liability 
fixed? 

112.  By  whom  must  notice  of  dishonor  be  given?  Illustrate.  What  should 
the  notice  contain?  Must  it  be  written?  If  written,  how  may  it  be  delivered? 
Within  what  time  must  it  be  given  when  the  holder  and  the  indorser  live  in 
the  same  place?  when  they  live  in  different  places?  If  an  indorser  receives 
notice,  what  may  he  do?  To  what  place  should  notice  be  sent?  What  is 
waiver?  When  is  notice  excused?  What  is  due  diligence?  What  is  the 
effect  of  failure  to  give  due  notice  ?  Suppose  a  bill  dishonored  for  nonacccpt- 
ancc  and  no  notice  to  drawer  or  prior  indorser,  are  the  drawer  and  indorser 
absolutely  discharged? 

Problem  24.  A  note  made  by  X  is  indorsed  by  A,  B,  C,  and  D,  and  is  in 
the  hands  of  E.  E  presents  it  to  X  and  it  is  dishonored.  E  gives  due  notice 
to  I),  who  then  gives  due  notice  to  B,  and  the  latter  to  A  and  C.  Who  arc 
liable  to  E? 

113.  What  is  protest?  By  whom  made?  When  is  protest  necessary? 
When  allowable?    What  is  the  evidence  of  it?    How  must  the  certificate  be 


204  NKCOriAHLK  INSTRUMENTS  [Cn.  IX 

iiiaiic  and  what  must  it  contain?    What  is  noting?     May  the  notary  give 
notice?    Who  pays  the  cost  of  protest?    What  is  reiixchangc? 

Probiem  2^. 

Ni:\v  YoKK,  Jan.  5,  191 6 

Two  months  after  date  pay  to  the  order  of  A.B.  one  hundred  dollars. 
To  C.  1).,  Chicago.  E.  F. 


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p.  R.  now  holds  the  bill  at  maturity  (March  5,  Sunday)  for  the  owner,  N.  O. 
{a)  State  exactly  what  P.  R.  should  do  as  to  presentment,  {b)  In  case  C.  D. 
refuses  to  pay,  state  what  P.  R.  should  do  in  order  fully  to  protect  all  the 
rights  of  N.  O. 

114.  When  should  a  check  be  presented?  W'hat  is  the  result  of  delay? 
How  should  a  check  be  sent  by  mail  for  collection?  What  is  the  effect  if  the 
holder  has  a  check  certified  ?  if  the  drawer  has  it  certified  ?  May  the  holder 
of  an  uncertified  check  sue  the  bank?  If  a  bank  wrongfully  dishonors  a 
check,  has  the  drawer  any  remedy? 

Problem  26.  A  check  drawn  by  B  on  a  Bristol  (Vermont)  b;ink  and  pay- 
able to  A's  order  is  mailed  to  A  at  Trumansburg,  New  York,  and  received 
there  August  9.  It  is  sent  the  same  day  to  an  Ithaca  (New  York)  bank  for 
collection.  On  August  10  the  Ithaca  bank  mails  it  to  its  correspondent  bank 
in  New  York  City,  where  it  is  received  on  the  eleventh.  On  the  twelfth  the 
New  York  bank  mails  it  to  its  correspondent  in  Burlington,  Vermont.  The 
thirteenth  is  Sunday.  The  Burlington  bank  receives  it  on  the  fourteenth,  and 
sends  it  at  once  to  Bristol,  but  the  Bristol  bank  had  already  suspended  on 
the  fourteenth.  If  sent  direct,  the  check  would  have  reached  Bristol  in 
twenty-four  hours  after  it  was  mailed  at  Trumansburg  or  Ithaca.  A  sues  B 
on  the  check.    Is  B  liable  for  the  whole  amount? 

115.  When  all  the  steps  have  been  taken  to  fix  an  indorser's  liability,  what 
right  has  the  holder  against  him?    What  are. the  indorser's  rights  if  he  pays? 


PART  IV.    AGENCY:  THE  CONDLXT 

OF  BUSINESS  THROUGH 

REPRESENTATIVES 


CHAPTER  X 

PRINCIPAL  AND  AGENT 

116.  Agency :  its  divisions  and  problems.  Agency  is  a  term 
signifying  the  legal  relations  established  when  one  man  is  author- 
ized to  represent  and  act  for  another  and  does  so  represent 
and  act  for  another.  Most  of  the  things  that  a  man  may  do  in 
person  he  may  do  through  a  representative.  An  individual  often 
does,  and  a  corporation  necessarily  must,  employ  persons  to  trans- 
act affairs  and  perform  services  essential  to  the  proper  conduct 
of  a  business,  A  single  concern  often  has  hundreds  and  even 
thousands  of  such  employees.  In  an  era  of  large  business  enter- 
prises like  the  present  the  subject  of  agency  is  one  of  the  most 
important  in  the  whole  range  of  business  law. 

The  acts  which  a  representative  may  perform  for  his  employer 
fall  into  two  classes:  (i)  the  making  of  contracts  for  the  em- 
ployer ;  (2)  the  doing  of  operative  or  mechanical  acts  in  the  serv- 
ice of  the  employer.  In  order  to  mark  the  distinction  the  subject 
is  divided  into  two  corresponding  heads  —  the  law  of  principal 
and  agent  and  the  law  of  master  and  servant.  In  the  first  there 
arc  three  persons  involved,  namely,  the  principal,  the  agent,  and 
the  third  party  with  whom  the  agent  brings  the  principal  into 
contractual  relations.  In  the  second  there  are  normally  but  two 
persons  involved,  namely,  the  master  and  the  servant;  but  if  in 
performing  the  assigned  service  the  servant  causes  some  injury 
to  a  third  person,  then  three  persons  become  involved. 

In  either  class  the  relation  itself  is  generally  created  by  con- 
tract. The  employer  engages  to  pay  an  agreed  compensation,  and 
the  employee  engages  to  perform  agreed  services;  but  an  employee 

205 


206  PRINCIPAL  AND  A(]ENT  [Cii.  X 

(agent  or  servant)  may  act  gratuitously.  So  far  as  third  parties 
are  concerned,  the  important  question  is  whether  the  agent  or 
servant  was  authorized  to  act,  not  whether  he  was  promised  com- 
pensation for  doing  so.  If  the  agent  or  servant  was  in)t  authorized, 
the  principal  or  master  would  not  be  liable  for  what  was  done 
unless  the  act  was  subsequently  ratified.  Prior  authorization  or 
subsequent  ratification  is  therefore  the  basis  of  a  principal's  or 
master's  liability.  The  main  problem  of  agency  is  to  discover 
when  and  under  what  circumstances  a  man  is  liable  for  the  acts 
of  another  who  represents  him  or  assumes  to  represent  him. 

The  problem  is  not  an  easy  one.  If  an  employer  were  liable 
only  for  the  specific  acts  which  he  expressly  authorizes  or  ratifies, 
there  would  be  little  difficulty.  But  the  law  may  hold  a  principal 
liable  for  a  specific  contract  which  he  never  authorized,  or  which 
he  even  forbade,  upon  the  ground  that  he  held  his  agent  out  to 
the  world  as  authorized  to  make  such  contracts ;  in  other  words, 
it  estops  him  from  denying  that  an  agent  had  the  authority  which 
he  led  others  reasonably  to  suppose  that  such  agent  possessed. 
And  it  may  hold  a  master  liable  for  a  specific  act  of  a  servant 
which  was  unauthorized  or  forbidden,  upon  the  ground  that  the 
act  was  performed  in  the  course  of  the  business  intrusted  to  the 
servant  and  in  the  furtherance  of  it. 

Exajnples  .•  i .  P  authorizes  A  to  travel  and  sell  goods  for  him  as  his  agent, 
but  forbids  A  to  hire  a  horse  on  credit,  furnishing  A  with  funds  for  the  pur- 
pose. A  hires  a  horse  on  the  credit  of  P  while  traveling  about  P's  business. 
P  is  liable.  The  general  power  conferred  to  travel  and  sell  goods  carries  with 
it,  as  to  third  persons,  the  incidental  power  to  contract  for  the  means  necessary 
to  this  end.    This  cannot  be  limited  by  secret  instructions  to  the  agent. 

2.  P  intrusts  A  with  goods  to  sell,  but  forbids  A  to  receive  the  payment. 
The  buyer  pays  A,  who  absconds  with  the  money.  P  cannot  recover  again 
from  the  buyer.  An  agent  having  possession  of  goods  with  power  to  sell  them 
has  implied  authority  to  receive  payment.  But  if  the  agent  has  not  possession 
of  the  goods  which  he  sells,  he  has  no  implied  authority  to  receive  payment. 

3.  M  tells  .S,  his  servant,  to  drive  a  load  of  goods  to  the  railway  station. 
S  drives  negligently  and  injures  C.  M  is  liable  because  .S  was  about  M's 
business. 

4.  As  above.  C  is  blocking  the  road.  S  becomes  angry  and  drives  his 
wagon  into  and  injures  C's  wagon.  If  S  does  this  to  further  M's  business, 
that  is,  to  get  the  goods  sooner  to  the  station,  M  is  liable.  If  S  does  it  solely 
to  vent  his  own  spite,  M  is  not  liable.    This  is  a  question  for  the  jury. 


§117]  APPOLNTMENT  OF  AGENTS  207 

I.    Appointment  of  Agents 

117.  Who  may  appoint  agents.  Generally  speaking,  a  person 
competent  to  make  any  contract  is  competent  to  appoint  an  agent 
by  contract  or  ratification. 

1.  bifants.  An  infant's  contracts  are  usually  voidable  at  the 
election  of  the  infant ;  they  are  not  absolutely  void.  It  is  some- 
times said,  however,  that  his  appointment  of  an  agent  is  abso- 
lutely void  ;  but  this  rule  is  now  generally  confined  to  one  form 
of  appointment,  namely,  by  a  formal  sealed  document  known  as 
a  power  of  attorney.  The  decided  tendency  of  the  courts  is  to 
hold  the  appointment  of  agents  by  infants,  in  any  other  form,  to 
be  voidable  at  the  infant's  election,  like  his  other  contracts.  Thus 
an  agency  to  sell  the  infant's  horse  would  be  voidable,  while  a 
power  of  attorney  to  sell  and  convey  his  lands  would  by  most 
states,  but  not  by  all,  be  held  void  and  of  no  effect.  There  seems 
to  be  no  sound  reason  for  such  a  distinction. 

2.  Insane  persons.  An  insane  person's  contracts  arc  voidable 
by  him  or  his  guardian  if  he  has  been  judicially  declared  to  be  in- 
sane or  if  the  other  party  to  the  contract  knew  him  to  be  insane. 
In  other  cases  the  contract  is  binding  if  it  has  been  so  far  executed 
that  the  other  party  to  it  cannot  be  put  /;/  statii  qtio.  Perhaps  a 
deed  by  an  insane  person  is  absolutely  void. 

3.  Married  women.  At  common  law  a  married  woman  could 
make  no  contracts  in  person,  and  could  not  therefore  appoint  an 
agent.  But  under  the  modern  married  women's  acts  a  married 
woman  may  generally  contract  as  freely  as  an  unmarried  woman, 
and  so  far  as  she  may  make  contracts  in  person  she  may  appoint 
agents  to  make  them  for  her. 

4.  Corporations.  Corporations  can  act  only  through  agents. 
The  directors  are  the  chief  agents,  and  they  may  appoint  such 
additional  agents  as  are  authorized  by  the  charter  or  as  are 
necessary  to  carry  out  the  objects  authorized  by  the  charter  (see 
sect.  I  51  post). 

5.  Unincorporated  associations.  Unincorporated  associations, 
such  as  clubs  and  other  societies,  are  not  legal  entities  like 
corporations.  If  they  appoint  agents,  the  members  individually 
and  collectively  arc  the  principals  so  far  as  they  authorized  the 


208  PRlNCirAL  AND  AGENT  [Cii.  X 

appointment.  Such  authority  may  be  {leathered  from  the  constitution 
and  by-laws  to  which  each  member  assents,  or  may  be  found  in 
a  specific  vote  of  a  meeting  at  which  members  were  actually 
present.  If  the  constitution  provides  that  a  majority  vote  shall 
bind  all  members,  assent  to  the  constitution  is  assent  to  any  action 
thus  taken  under  it.  An  agent  or  committee  of  a  club  may  be 
personally  liable  wlien  the  other  members  are  not. 

Example.  A  college  class  voted  to  publish  an  annual  and  elected  A  busi- 
ness manager.  A  contracted  with  C  for  the  printing.  All  the  members  of  the 
class  were  present  at  the  meeting  except  G.  All  are  liable  to  C  except  G.  If 
H  had  been  present  and  had  voted  against  the  publication,  the  question  whether 
he  was  also  liable  would  be  determined  by  a  finding  as  to  whether  II  acquiesced 
in  the  decision  of  the  majority. 

6.  Partnerships.  In  a  partnership  each  member  is  both  prin- 
cipal and  agent.  Each  is  liable  as  principal  for  the  acts  of  the 
other  partners  within  the  scope  of  the  partnership  business,  and 
each,  by  acting  as  agent  for  the  partnership,  may  bind  them. 
One  of  the  implied  powers  of  a  partner  is  to  appoint  necessary 
agents.  If  rightfully  appointed,  an  agent  may  by  his  acts  bind 
the  partnership. 

7.  Subai^cncv.  A  principal,  1',  may  empower  an  agent,  A,  to 
employ  a  subagent.  If  under  such  authority  A  appoints  B  as 
subagent,  B  becomes  agent  of  P.  If  there  is  no  authority  to 
appoint  a  subagent,  the  agent  must  act  personally  in  all  matters 
involving  judgment,  skill,  or  discretion,  but  may  delegate  merely 
ministerial  or  mechanical  duties  to  another.  In  such  a  case  the 
subordinate  is  the  agent  not  of  the  principal  but  of  the  agent,  and 
the  latter  is  liable  to  the  principal  for  any  default  of  the  subagent. 

118.  Who  may  be  an  agent.  Any  person  may  be  an  agent  and 
be  vested  with  authority  to  bind  his  principal.  An  infant,  a  mar- 
ried w^oman,  and  probably  a  lunatic  may  be  the  instrumentality  for 
bringing  the  principal  into  contractual  relations  with  third  parties. 
If  the  principal  chooses  and  empowers  an  agent,  he  must  be 
responsible  for  the  results. 

A  principal  may  appoint  joint  agents.  Ordinarily  joint  agents 
must  act  jointly  ;  but  if  a  partnership  is  acting  as  agent,  one  partner 
may  act  alone  ;  and  if  a  corporation  is  acting  as  agent,  a  majority 
of  the  directors  may  decide  for  all. 


Power  of  Attorney 


^noto  all  iHen  bj  tljcse  presents* 

That   \'    Thomas  Martin,    of  the   city  of  Elmira,    county  of  Chemung,    and 


state   of  New  York, 


have  made,  constituted  and  appointed,  and  by  C!)C!3C  fjrcficntfi  do  make,  con- 
stitute and  appoint..yfVter...BrP.y.".r..PT...th?...s.^.^.d.city.   my 

true  and    lawful  attortiey    for ?.? and   in "py name,   place    and 

stead    to  erant,   bargain,   and  sell  all  such  lands,    tenements  and  heredita= 
ments  whatsoever,    situated   in  the  state  of  New  York,   whereof  I  now  am, 
by  any  ways  or  means  howsoever,    entitled  to  or   interested   in.    either  in 
severalty  or  jointly,    or   in  common  with  any  other  person  or  persons,    or 
any  part,    share,    or  proportion  thereof,   and  all   such  right,   title,    inter= 
est.    claim  and  demand,   both  in  law  and  In  equity,    as   I  may  have   in  the 
same,    for  such  sum  and  price   and   on   such   terms   as    to  him  shall   seem 


giving  and  granting  unto ?y. said  attorney    full    power  and    authority 

to  do  and  perform  all  and  every  act  or  thing  whatsoever  requisite  and  necessary 
to  be  done  in  and  about  the  premises,  as  fully  to  all  intents  and  purposes 
as  \ might  or  could  do  if  personally  present,  with  full  power  of  sub- 
stitution and  revocation,  hereby   ratifying  and  confirming  all  that ^y.. 

said  attorney     or ^S.f. substitute  shall  lawfully  do  or  cause  to  be  done 

by  virtue  thereof. 

^Tn  W\X\\t$$   ?2?l)CrfOf,.^-I— //<7ve  hereunto  set ^^-T.«'y.---r. 
hand      and    seal      the ^.\^yy>. day     of ^.fi^y^^H.y One    thousand 


nine  hundred  and ?.^^.^-^ ?."?.•. 


/' 


Jn  presence  of 


3^ltonnxhih   llU.vtinv 


.[L.S.] 


;S»tate  of  jHieto  gorh, 

County   of Ch?mune 

^^^^.      of    .^^"'^r.* 


On  this— --.r*.r*^^.-------.day  of.rrr--:.^.*."."*rY.r-— :  in  the  year  One   thousand 

nine  hundred  and..^^''^^®" before  me,  the  subscriber,  personally 

appeared Thomas  Martin to   ^^g  personally    known    lo    be 

the  same  person    described  in  and  who  executed  the  foregoing  instrument,  and 
he acknowledged  to  me  that     he     executed  the  same. 


r  NOTARY'S  ~1 
\       SEAL       J 


ett^'l^ 


T.. 


d^. 


Notary  Public  for  Chemung  County,  New  York. 
2oy 


2IO  rKlNCirAL  AND  ACiKNT  [Cii.  X 

119.  Form  of  appointment.  Generally  an  agent  may  be  ap- 
pointed by  parol.    To  this  there  are  two  exeeptions. 

1.  The  Statute  of  Frauds  in  a  few  states  requires  that  where 
a  contract  between  P  and  C  must  be  in  writing  and  signed  by  P 
or  his  agent,  the  latter's  authority  to  sign  shall  also  be  in  writing. 
This  is  not  generally  found  in  the  statute.  As  between  the  prin- 
cipal and  agent,  a  contract  of  agency  not  to  be  performed  within 
one  year  must  be  in  writing  ;  but  if  an  agent  acted  under  a  parol 
contract,  the  principal  would,  as  to  third  persons,  be  bound  by 
the  agent's  acts. 

2.  Where  the  contract  between  the  principal  and  a  third  per- 
son is  required  to  be  under  seal  (as  a  conveyance  of  lands),  the 
authority  of  the  agent  to  execute  the  contract  must  also  be  under 
seal.  Such  a  formal  authorization  is  commonly  called  a  power 
of  attorney.    A  power  of  attorney  may  be  used  in  any  case. 

120.  Ratification.  Ratification  consists  in  assenting  to  an  act 
done  in  one's  name  or  on  one's  behalf  either  by  a  person  who  had 
no  authority  to  represent  one  at  all  or  by  a  person  who,  having 
some  authority,  exceeded  it.  When  such  unauthorized  act  comes 
to  the  attention  of  him  in  whose  name  or  on  whose  behalf  it  was 
ostensibly  done,  he  has  an  election  to  repudiate  it  or  to  adopt  it. 
If  he  elects  to  adopt  it,  this  constitutes  ratification,  and  he  is  in 
precisely  the  same  situation  as  if  he  had  originally  authorized  it. 

Example  i.  A,  knowing  his  friend  V  is  on  the  lookout  for  a  rare  book, 
and  seeing  one  at  a  bookshop,  buys  the  book  in  P's  name  and  upon  P's  credit. 
When  P  learns  of  this  he  tells  the  bookseller  to  send  him  the  book,  but 
later,  before  receiving  it,  countermands  the  order.  P  has  ratified  and  cannot 
afterwards  withdraw  his  assent.  P's  contract  dates  from  the  time  of  the  sale 
to  A,  not  from  the  time  of  ratification. 

I .  Essentials  of  ratification.  The  essentials  of  ratification  are 
given  below. 

a.  The  contract  must  have  been  made  in  the  name  of  and 
in  behalf  of  an  existing  and  ascertainable  person.  If  one  con- 
tracts in  the  name  of  a  corporation  not  yet  formed,  the  corpo- 
ration, when  formed,  cannot  strictly  ratify,  although  its  assent  may 
amount  to  the  acceptance  of  an  offer.  So  if  A,  intending  to  act 
without  authority  for  P,  makes  a  contract  in  his  own  name,  P 
cannot  ratify. 


§120]  APPOINTMENT  OF  AGENTS  21 1 

b.  The  one  in  whose  name  the  contract  was  made  must  assent 
to  it.  Such  assent  may  be  imphed,  for  example,  by  accepting  bene- 
fits under  the  contract.  Silence  alone,  where  there  is  no  duty  to 
speak,  is  not  sufficient  evidence  of  assent ;  but  where,  for  example, 
an  agent  who  has  some  authority  exceeds  his  authority,  his  prin- 
cipal's silence  after  full  knowledge  of  the  facts  may  amount  to 
assent.  The  assent  must  be  as  to  the  whole  act ;  the  principal 
cannot  ratify  a  part  and  disaffirm  a  part.  If  he  takes  the  benefit, 
he  must  bear  the  burdens. 

Example  2.  A  without  any  authority  sold  and  delivered  to  C  a  load  of 
coal  belonging  to  P.  In  delivering  the  coal  he  negligently  broke  C's  window. 
P  sent  C  a  bill  for  the  coal.  P  thereby  ratified  A's  acts  and  became  liable  to 
C  for  damages  for  the  broken  window. 

c.  The  principal  must  be  competent.  If  he  could  have 
appointed  an  agent,  he  can  ratify  with  the  same  results  as  if 
he  had  previously  authorized  (see  sect,  iiy  ante). 

d.  If  the  principal  must  adopt  a  particular  form  in  order  to 
appoint,  he  must  follow  the  same  form  in  order  to  ratify  (see 
sect.  1 19  ante). 

2.  Ratification  of  forgery.  If  A  forges  P's  name  to  an  instru- 
ment, as  a  promissory  note,  can  P  ratify  the  act }  Upon  this 
the  cases  differ.  Some  hold  that  P  may  ratify,  because  he  could 
have  authorized  ;  others  hold  that  P  cannot  ratify,  because  A  does 
not  in  fact  assume  to  act  for  P  in  a  forgery,  and  that  P's  only 
motive  in  ratifying  would  be  to  conceal  the  crime  of  A.  But  all 
cases  agree  that  P  may  be  estopped  to  deny  the  validity  of  the 
signature  where,  after  P  acknowledges  such  validity,  the  instru- 
ment is  taken  by  an  innocent  holder  for  value  relying  upon  such 
acknowledgment. 

3.  Legal  effect  of  ratification.  Ratification  relates  back  to  the 
time  of  the  formation  of  the  contract  or  the  doing  of  the  act, 
and  the  principal  and  the  third  person  are  in  the  .same  position 
as  if  the  agent  had  in  fact  had  full  authority  at  that  time. 

4.  Effect  of  nonratification.  If  the  principal  refuses  to  ratify, 
the  agent  is  liable  to  the  third  party  in  damages  for  a  breach 
of  his  implied  warranty  of  authority.  Ivvcry  agent  who  makes 
a  contract  in  the  name  of  another  warrants  that  he  has  authority 
from  that  other  to  make  it. 


212  rRINCirAT-  AND  A(11':N'I'  [Ch.  X 

121.  Agency  by  necessity.  A  wife  has  implied  authority  given 
her  by  the  law  to  pledge  her  husband's  eredit  lor  neeessaries. 
This  exists  independent  of  the  will  of  the  husband.  But  the  one 
furnishing  the  goods  has  the  burden  of  showing  that  they  were 
in  fact  necessaries  and  that  they  were  not  otherwise  provided. 

An  infant  child  has  not,  in  England  and  in  some  of  our  states, 
any  similar  authority  to  pledge  his  father's  credit  for  neces- 
saries, but  some  states  give  him  such  implied  authority.  This 
is  therefore  a  disputed  question. 

In  some  cases  an  unpaid  vendor  in  possession  of  the  goods 
has  implied  authority  to  sell  them  for  the  vendee  and  charge 
the  vendee  the  difference  between  the  contract  price  and  the 
amount  received  upon  the  resale  (see  sect.  58  ante). 

122.  Termination  of  agency.  An  agency  may  be  terminated 
in  various  ways,  some  of  which  are  as  follows : 

1.  By  the  parties.  The  principal  and  the  agent  may  agree  to 
terminate  their  relation,  or  (subject  to  the  exception  noted  in  the 
next  section)  the  principal  may  dismiss  the  agent,  or  the  agent 
may  quit  the  employment.  If  either  principal  or  agent  wrong- 
fully terminates  an  agency  which  was  created  by  bilateral  con- 
tract, he  is  liable  to  the  other  party  for  breach  of  contract.  If 
the  principal  terminates  it,  he  should  notify  third  persons  with 
whom  the  agent  has  been  accustomed  to  deal,  or  he  may,  as  to 
them,  be  estopped  to  deny  the  agency  if  the  agent  makes  further 
contracts  with  them.  If  the  agent  or  servant  wrongfully  quits  the 
employment  before  the  contract  term  has  expired,  he  cannot  in  most 
states  recover  any  compensation  for  what  he  has  already  done  ;  but 
a  few  states  allow  him  to  recover  the  value  of  such  services,  less 
the  damages  the  principal  or  master  has  suffered  from  the  breach. 

2.  Death.  Subject  to  the  exception  noted  in  the  next  section, 
the  death  of  either  party  terminates  the  agency.  If,  after  the 
death  of  the  principal,  the  agent,  though  ignorant  of  such  death, 
makes  a  contract  with  a  third  party,  also  ignorant  of  such  death, 
the  contract  binds  no  one.  The  dissolution  of  a  corporation  has 
the  same  effect  as  the  death  of  an  individual. 

3.  Illness  of  agent.  The  illness  of  an  agent  may  create  an 
impossibility  of  performance,  which  will  terminate  the  agency. 
The  illness  of  the  principal  would  ordinarily  have  no  effect 


§§123,124]  APPOINTMENT  OF  AGENTS  213 

4.  Insanity.  The  insanity  of  either  party  would  terminate 
the  agency.  But  if  the  principal  becomes  insane,  a  person  who 
deals  with  the  agent  in  ignorance  of  such  insanity,  and  before 
the  principal  has  been  judicially  declared  to  be  insane,  would 
be  protected. 

5.  Impossibility.  If  the  subject  matter  of  the  agency  is 
destroyed,  the  agency  would  of  necessity  be  terminated.  If  the 
agent  is  arrested  and  imprisoned,  this,  like  illness  or  insanity, 
renders  further  performance  by  him  impossible.  If  two  agents 
are  authorized  to  do  the  same  act  and  one  accomplishes  it,  the 
agency  of  the  other  is  terminated. 

123.  Irrevocable  agencies.  The  above  rules  are  subject  to  the 
exception  that  if  an  agency  be  "a  power  coupled  with  an 
interest,"  the  agency  is  irrevocable.  An  agent  has  a  power 
coupled  with  an  interest  when  to  his  authority  to  act  for  his 
principal  is  added  an  interest  in  the  subject  matter  of  the  agency 
itself,  as  distinguished  from  an  interest  in  the  compensation  he 
is  to  receive  for  his  ser\-ices. 

Exafuples :  i .  P  pledges  goods  to  A  for  a  debt  and  gives  A  power  to 
sell  the  goods  upon  default.  P  cannot  revoke  this  power  nor  will  it  be  revoked 
by  P's  death  or  insanity.  A  has  an  interest  in  the  subject  matter  to  secure 
his  debt. 

2.  P  sends  goods  to  A,  a  commission  merchant,  to  sell  for  him  and 
requests  A  to  make  an  advance  of  a  specified  sum.  A  does  so.  P  cannot 
revoke  this  agency,  nor  will  the  law  revoke  it.  A  has  an  interest  in  it  beyond 
the  interest  of  acting  as  agent,  because  he  is  to  reimburse  himself  to  the 
extent  of  the  advance  from  the  proceeds  of  the  sale.  But  the  interest  in  the 
compensation  alone  does  not  constitute  a  power  coupled  with  an  interest. 

II.    Oiu.KiATioN.s  oi"  Principal  and  Aci-.nt  to  Ivacii   ()riii:R 

124.  Obligations  of  principal  to  agent.  The  obligations  of  the 
principal  to  the  agent  may  be  briefly  enumerated  under  the  heads 
of  compensation,  reimbursement,  and  indemnity. 

I.  Dnty  to  compensate  a<;cnt.  The  ])rincipal  must  pay  to  the 
agent  the  agreed  com  pen. sat  ion,  if  any,  or  a  reasonable  com- 
pensation where  none  has  been  agreed  upon.  If  the  principal 
ratifies  an  unauthorized  act,  the  .same  result  follows.  If  the 
principal  wrongfully  revokes  the  authority  created  by  a  bil.slcral 


214  PRINCIPAL  AND  AGENT  [Cn.  X 

contract  of  agency,  the  agent  may  sue  for  the  breach.  His 
damages  arc  presumptively  the  entire  stipulated  compensation, 
but  the  principal  may  show  what  the  agent  might  have  earned 
in  a  similar  occupation  during  the  unexpired  term,  and  thus  reduce 
the  damages.  An  agent  would  not  be  justified  in  remaining  idle 
after  his  discharge  if  he  could  by  reasonable  diligence  secure 
other  and  similar  employment.  If  the  agency  is  revoked  by 
impossibility,  the  agent  may  recover  the  reasonable  value  of  the 
services  actually  performed.  If  the  agent  renounces  his  contract 
of  employment,  he  can  recover  no  compensation  in  most  states  ; 
but  some  permit  him  to  recover  the  reasonable  value  less  the 
damages  sustained  by  the  principal  from  the  breach.  An  agent 
cannot  recover  compensation  for  illegal  services,  as  lobbying, 
betting,  and  the  like. 

2.  Duty  to  reimburse  agent.  The  principal  must  reimburse  the 
agent  for  all  expenses  necessarily  incurred  by  him  in  the  discharge 
of  the  agency,  unless  the  agent's  compensation  is  intended  to 
cover  these  expenses. 

3.  Indemnity.  If  an  agent  is  compelled  to  pay  damages  be- 
cause of  his  innocently  following  his  employer's  instructions,  he 
is  entitled  to  be  indemnified. 

Exa))iple.  P  directs  A  to  sell  certain  goods.  A  does  sell  them.  C  after- 
wards claims  the  goods  were  his  and  sues  A  for  conversion  and  recovers  from 
A  their  full  value.  P  must  indemnify  A.  But  if  A  had  known  the  goods  did 
not  belong  to  P,  he  could  not  recover  indemnity. 

125.  Obligations  of  agent  to  principal.  An  agent  owes  to  his 
principal  the  duties  of  obedience,  prudence,  skill,  and  good  faith, 
and  is  also  bound  to  render  accounts.  He  cannot  delegate  his 
duties. 

1.  Obedience.  The  agent  must  follow  his  instructions  faith- 
fully.   If  he  does  not,  and  loss  ensues,  he  must  make  it  good. 

Example  i.  P  sends  to  A  goods  to  be  sold  for  cash.  A  sells  them  to  C 
and  takes  C's  check.  The  check  is  dishonored  and  C  absconds.  A  is  liable 
to  P  for  the  loss. 

2.  Prudence  and  skill.  An  agent  is  bound  to  possess  and  to 
exercise  the  prudence,  skill,  and  diligence  necessary  to  the  proper 
conduct  of  the  business  intrusted  to  him. 


§125]  MUTUAL  OBLIGATIONS  215 

Examples :  1.  P  sends  A  money  to  loan  upon  security.  A  loans  it  upon 
worthless  securities  which  a  prudent  investor  would  not  take.  A  is  liable  to 
P  for  the  loss. 

3.  P  authorizes  A  to  effect  insurance  on  P's  property.  A  takes  a  policy 
in  a  company  which  prudent  men  believe  to  be  of  doubtful  solvency.  Loss 
ensues.    A  must  make  it  gcod. 

3.  Good  fait Ji.  The  relation  is  a  fiduciary  one.  The  agent  is 
bound  to  act  with  entire  good  faith  toward  his  principal.  He 
cannot  act  for  both  his  principal  and  a  third  party.  He  cannot 
buy  his  principal's  property,  or  sell  his  own  to  his  principal, 
without  the  latter's  full  knowledge. 

Examples :  4.  P  directs  A  to  buy  a  horse.  X  directs  A  to  sell  a  horse. 
A  sells  X's  horse  to  P.  Neither  P  nor  X  is  bound.  A  cannot  act  for  both 
parties  unless  each  knows  that  his  agent  is  also  acting  for  the  other.  A  can 
recover  no  compensation. 

5.  P  directs  A  to  buy  a  horse.  A  sells  P  his  own  horse.  When  P  discovers 
this,  he  may  rescind  the  contract.    A  cannot  be  both  buyer  and  seller. 

6.  A  works  for  P  in  the  manufacture  of  a  secret  compound.  Afterwards 
A  begins  to  manufacture  the  same  compound.  P  may  enjoin  A  from  doing 
so.  An  agent  or  servant  cannot  disclose,  or  use  for  his  own  advantage,  trade 
secrets  learned  while  in  the  employment  of  another. 

4.  Accounting.  The  agent  must  keep  and  render  accounts. 
He  must  keep  his  principal's  money  or  goods  separate  from  his 
own  ;  if  he  mixes  them  and  any  loss  results,  the  agent  must 
bear  it.  He  can  make  no  secret  profits  out  of  his  principal's 
business.  He  cannot,  by  the  weight  of  authority,  even  keep  moneys 
obtained  for  the  principal  in  an  illegal  transaction. 

Examples:  7.  An  agent  deposits  his  principal's  money  in  a  bank  in  his 
own  name.  The  bank  fails.  The  agent  must  bear  the  loss.  Had  he  deposited 
in  his  principal's  name  (P,  by  A,  agent),  the  loss  would  have  fallen  on  the 
principal  if  the  agent  acted  prudently  in  selecting  the  bank. 

8.  P  directs  A  to  purchase  coal.  The  trade  price  is  $5  a  ton.  X  agrees  that 
if  the  agent  will  purchase  of  him  he  will  return  to  the  agent  50  cents  on  each 
ton.  A  buys  of  X  and  P  pays  X  at  the  rate  of  S5  a  ton.  X  gives  A  50  cents 
on  each  ton.    P  may  compel  A  to  account  to  him  for  this  money. 

5.  Nondelegation  of  duties.  An  agent  cannot  delegate  to 
another  the  exercise  of  any  discretion  or  judgment  imlcss  his 
principal  has  authorized  him  to  do  so.  He  may  delegate  the 
performance   of   merely    mechanical    duties,    like   the   writing   of 


2l6  rKlNCll'AL  AND  ACJKiNT  [CilX 

contracts  or  other  cUtcumcnts,  but  of  course  he  is  liable  for  the 
result.  If  he  delegates  cliscretiouary  duties  without  authorit)', 
he  is  liable  for  any  loss.  If  he  has  authority  to  select  sub- 
agents,  he  is  liable  only  if  he  fails  to  exercise  due  care  in 
selecting  them. 

JCxiU/i/>/ts  :  9.  r  directs  A  to  sell  goods.  A  engages  B  to  sell  them  and 
turns  them  over  to  B.  A  is  liable  in  tort  for  conversion  of  the  goods  in 
delivering  them  to  B  to  sell. 

10.  P  deposits  a  check  in  tlie  X  bank  in  New  York  for  collection.  The 
check  is  drawn  upon  a  bank  in  Ciiicago,  and  the  X  bank  sends  it  to  the  Y 
bank  in  Chicago  for  collection.  The  Y  bank  negligendy  fails  to  present  it  in 
due  time,  and  loss  ensues  to  P.  Is  the  X  bank  liable  to  P?  Upon  this  courts 
differ.  Some  say  P  impliedly  authorizes  the  X  bank  to  employ  a  subagent,  and 
if  the  X  bank  uses  due  care  in  selecting  the  Y  bank,  it  is  not  liable ;  other 
courts  say  P  contracts  with  the  X  bank  alone  and  assumes  no  responsibility 
for  the  acts  of  those  whom  the  X  bank  engages  to  assist  in  the  collection. 
The  real  question  is,  Had  the  X  bank  authority  from  P  to  appoint  a  sub- 
agent  for  P.'' 

6.  Del  credere  agent.  A  del  c7-cde7'e  agent  undertakes  to 
guaranty  the  principal  against  loss  from  credits  given  by  the 
agent  to  third  persons  in  the  course  of  the  agency.  In  the 
United  States  it  is  generally  held  that  the  agent  is  liable  pri- 
marily and  not  as  a  mere  guarantor,  and  that  therefore  his 
promise  need  not  be  in  writing.  This  agency  is  pretty  close  to 
a  sale  by  the  principal  to  the  agent  and  resale  by  the  agent 
to  third  persons,  but  it  differs  in  that  the  title  to  the  goods 
remains  in  the  principal  until  they  are  sold  to  third  persons. 

7.  Gratuitous  agent.  If  an  agent  promises  to  act  gratuitously, 
the  promise  is  unenforceable  ;  but  if  he  does  act,  he  is  bound 
to  act  with  care  and  prudence.  It  is  generally  said  that  he  is 
bound  to  use  slight  care  and  is  liable  only  for  gross  negligence. 
The  true  standard  is  the  care  that  reasonable  men  give  under 
like  circumstances.  For  example,  bank  directors  serve  gratui- 
tously ;  a  particular  board  is  not  bound  to  use  as  much  care  and 
vigilance  as  an  individual  banker  gives  to  his  own  business, 
but  must  exercise  the  care  which  is  ordinarily  and  rea.sonably 
given  by  such  boards,  as  that  is  fixed  by  usage  and  experience 
(see  sect.  63  ante). 


§§126,127]  LIABILITY  OF  PRINCIPAL  21/ 

III.    Liability  of  Prinxipal  to  Third  Parties 

126.  General  Rules.  The  principal  is  liable  upon  all  contracts 
made  by  his  agent  within  the  scope  of  the  actual  authority  given 
to  the  agent. 

The  principal  is  also  liable  upon  all  contracts  made  by  the 
agent  within  the  scope  of  the  apparent  or  ostensible  authority 
conferred  upon  the  agent. 

The  principal  is  not  liable  upon  contracts  made  by  his  agent 
beyond  the  scope  of  the  actual  or  ostensible  authority  unless  he 
ratifies  such  contracts. 

Example's  .•  i .  P  authorizes  A  to  sell  goods,  but  at  not  less  than  market  price 
and  to  responsible  parties  only.  A  sells  to  X.  P  seeks  to  escape  the  contract 
on  the  ground  that  X  is  not  a  responsible  party  and  that  A  has  sold  X  the 
goods  at  less  than  the  market  price.  P  is  bound  by  the  sale.  His  instruc- 
tions to  his  agent,  not  communicated  to  X,  could  not  limit  the  ostensible 
authority  of  the  agent.  Of  course  A  is  liable  to  P  for  any  loss  occasioned  by 
his  disobedience  of  instructions. 

2.  P  authorizes  A  to  sell  goods.  A  barters  P's  goods  for  X's  horse  and 
buggy.  P  is  not  bound.  An  authority  to  sell  is  not  in  any  sense  an  authority 
to  barter. 

3.  P  authorizes  A  to  buy  goods  on  credit.  A  buys  goods  of  X  for  P 
and  gives  X  a  promissory  note  signed  "  P,  by  A,  agent."  P  is  not  bound.  An 
authority  to  buy  on  credit  is  not  an  ostensible  authority  to  make  negotiable 
paper.   i^Problem  :  What  is  X's  remedy  upon  this  note.''   See  sect.  120,  par.  4.) 

127.  Agent's  apparent  authority.  Aj^parent  authority  is  that 
authority  which  may  reasonably  be  inferred  from  the  circumstances 
of  the  agency.  In  determining  whether  an  agent  has  apparent 
authority  to  do  a  particular  act  the  following  circumstances  may 
be  considered. 

I,  Powers  actually  conferred.  The  powers  actually  conferred 
may  be  the  limit  of  powers  real  and  o.stensible.  This  is  particu- 
larly the  case  where  the  authority  is  contained  in  a  formal  power 
of  attorney.  .Such  an  instrument  is  construed  strictly,  and  (he 
third  person  is  bound  to  examine  it  in  order  to  determine  the 
extent  of  the  agent's  authority,  A  power  of  attorney  to  sell 
lands  in  New  York  would  confer  no  authority  to  sell  lands  in 
Mas.sachusctts  (.see  page  209).  If  the-  power  is  conferred  in  an 
instrument   not   under  seal,  or  orally,   the  construction    is   more 


2l8  TRlNCll'AL  AM)  AGENT  [Cii.  X 

liberal ;  but  in  such  a  case  the  third  person  cannot  claim  to  rely 
upon  an  apparent  authority  if  he  knows  the  exact  terms  of  the 
actual  authority. 

2.  J\Ki'irs  incidental  to  those  confc7-rcd.  With  every  actual 
authority  goes  the  implied  authority  to  use  the  means  reasonably 
necessary  to  carry  out  the  actual  authority.  An  authority  to  sell 
and  convey  real  property  carries  with  it  the  power  to  make  a 
deed  containing  the  usual  covenants  of  warranty  and  to  receive 
the  purchase  money  upon  delivery  of  the  deed.  The  authority  to 
travel  at  the  principal's  expense  in  order  to  sell  goods  carries 
with  it  the  power  to  hire  a  horse  or  use  other  reasonable  means 
of  travel. 

3.  Poivcrs  annexed  by  custom.  The  incidental  powers  may  be 
enlarged  by  custom  or  usage.  Some  agents,  like  factors,  brokers, 
and  auctioneers,  follow  a  customary  calling,  and  naturally  many 
usages  of  the  calling  have  grown  up.  One  who  employs  such  an 
agent  is  supposed  to  do  so  with  knowledge  of  established  usages, 
and  must  be  held  to  clothe  the  agent  with  all  the  authority 
customarily  exercised  by  agents  in  that  calling. 

4.  Powers  ijifcTred  front  the  cond7iet  of  the  principal.  Over 
and  above  the  actual,  incidental,  and  customary  powers  of  an 
agent,  there  may  be  apparent  powers  gathered  from  the  conduct 
of  the  principal.  If  a  principal  by  his  conduct  leads  third  persons 
reasonably  to  infer  that  he  has  given. his  agent  certain  powers,  and 
they  act  upon  this  appearance  of  authority,  the  principal  will  be 
estopped  to  deny  that  his  agent  did  possess  those  powers.  If, 
after  an  agent  has  made  a  mortgage  investment  for  his  principal, 
the  principal  permits  the  agent  to  retain  the  bond  and  mortgage, 
he  will  be  estopped  to  deny  that  the  agent  had  authority  to  receive 
the  interest  or  installments  due  upon  the  securities. 

5.  General  and  special  agents.  A  general  agent  is  one  author- 
ized to  act  for  his  principal  in  all  matters  pertaining  to  a  particular 
business.  A  special  agent  is  one  (other  than  an  agent  following  a 
customary  calling)  who  is  authorized  to  act  for  his  principal  in  a 
single  specific  transaction.  A  principal  impliedly  confers  larger 
powers  upon  a  general  agent  than  upon  a  special  one.  A  third 
person  should  know  tliat  an  agent  engaged  to  do  one  special  act 
is  likely  to  have  special  instructions,  and  should  inquire  into  the 


§12S]  LIABILITY  OF  PRINCIPAL  219 

extent  of  the  authority.  In  such  a  case  the  actual  authority  is 
less  likely  to  be  enlarged  by  any  of  the  considerations  above 
enumerated  ;  but  even  in  such  a  case  private  instructions  not 
communicated  to  the  third  person  may  not  avail  the  principal. 

Examples  .•  i .  P  puts  his  grocery  store  in  charge  of  A,  as  general  manager, 
to  buy  and  sell  goods  and  transact  the  necessary  business.  A  exchanges  sugar 
for  eggs.    This  is  within  his  implied  powers. 

2.  P  authorizes  A  as  a  special  agent  to  sell  a  barrel  of  sugar.  A  exchanges 
the  sugar  for  eggs.    This  is  not  within  his  implied  powers. 

128.  Agents  following  customary  calling.  Some  forms  of 
agency  are  so  well  established  and  have  been  so  long  practiced 
that  they  have  gathered  a  considerable  body  of  customs  in 
conformity  with  which  such  agencies  are  conducted.  A  few  of 
these  will  be  briefly  considered. 

1 .  Factors.  Factors  or  commission  merchants  are  agents  whose 
regular  business  it  is  to  receive  consignments  of  goods  and  sell 
them  for  a  commission  or  percentage.  The  principal  is  bound  by 
the  customs  of  the  calling.  These  customs  have  been  adopted  in 
order  to  protect  innocent  purchasers  who  are  unable  to  know 
whose  goods  the  factor  is  selling  or  what  instructions  the  owner 
may  have  given.  The  factor  may  sell  at  any  price,  for  cash  or 
credit,  may  warrant  the  goods  if  such  goods  are  customarily  sold 
with  a  warranty,  and  may  take  negotiable  instruments  in  a  sale  on 
credit.  He  cannot  barter  the  goods.  At  common  law  he  cannot 
pledge  them  for  his  own  debt,  but  under  the  Factors  Acts  an 
innocent  pledgee  is  protected.  The  factor  has  a  general  lien  upon 
the  goods  of  his  principal  in  his  hands,  or  upon  their  proceeds 
for  all  sums  due  him  from  the  principal  for  advances  made  or 
obligations  incurred  in  connection  with  the  relationship. 

2.  Brokers.  Brokers  are  agents  whose  regular  business  it  is 
to  make  contracts  without  having  possession  of  the  goods,  or  to 
negotiate  for  the  purchase  of  property,  or  for  loans,  or  for  insur- 
ance, and  the  like.  A  merchandise  broker  who  sells  goods  has 
less  apparent  authority  than  a  factor,  because  he  has  not  posses- 
sion of  the  goods.  He  cannot  receive  payment;  he  cannot  usu- 
ally warrant  the  goods ;  custom  may  permit  a  sale  on  credit, 
but  the  custom  in  this  respect  is  not  so  broad  as  in  the  case 
of  factors. 


2JO  PRINCIU'AL  AND   AC.l'lNT  [c:i[.  X 

3.  Auctioneers.  Auctioneers  are  aj;enls  whose  business  it  is  to 
sell  property  publicly  to  the  hii^hest  bidder.  Until  the  fall  of  the 
hammer  he  is  the  agent  of  the  seller  ;  after  that  he  is  also  agent 
of  the  buyer  so  as  to  enable  him  to  make  the  note  or  memoran- 
dum required  by  the  Statute  of  l-'rauds.  He  must  sell  for  cash, 
and  not,  unless  specially  authorized,  on  credit  or  for  other  goods 
or  for  negotiable  paper.  He  may  receive  payment.  He  cannot 
warrant  unless  specially  authorized,  nor  can  he  rescind  the  sale 
when  once  made. 

4.  Attorneys  at  Imv.  An  attorney  at  law  is  an  agent  whose 
business  it  is,  as  a  duly  qualified  officer  of  the  court,  to  represent 
his  principal  in  the  conduct  of  litigation  or  other  legal  proceed- 
ings. He  has  implied  authority  to  control  the  proceedings,  but 
he  cannot  compromise  or  release  his  client's  claim  or  give  up 
any  substantial  right  of  his  client  unless  specially  authorized. 
He  may  receive  payment  in  full  and  give  a  release.  He  is 
bound  to  the  highest  good  faith  toward  his  client,  and  is  liable 
to  the  client  for  the  negligent  management  of  the  affairs  intrusted 
to  him. 

5.  Batik  cashiers.  A  bank  cashier  is  the  chief  executive  offi- 
cer of  a  bank.  Tellers  and  other  subordinate  officers  are  under 
his  control.  He  has  power  to  draw  checks  or  drafts  upon  the 
funds  of  the  bank  deposited  with  other  banking  or  trust  com- 
panies ;  to  indorse  and  transfer  for  collection,  discount,  or  sale 
the  negotiable  paper  or  other  securities  owned  by  the  bank  ;  to 
certify  checks  drawn  upon  the  bank  by  depositors ;  to  collect 
moneys  due  the  bank  ;  to  borrow  money  and  to  loan  money. 

129.  Undisclosed  principal.  An  agent,  in  making  a  contract, 
may  do  so  in  his  own  name  without  disclosing  to  the  third  party 
that  he  is  in  fact  acting  for  a  principal.  Factors  usually  make 
contracts  in  this  way.  In  such  cases  the  agent  is  always  liable, 
but  the  principal  may  be  also.  Conversely,  the  principal  may 
enforce  such  a  contract  against  the  third  party. 

I.  General  rule.  Subject  to  some  exceptions,  an  undisclosed 
principal  is  liable  to  third  parties  with  whom  an  authorized  agent 
has  dealt  within  the  scope  of  the  agency,  in  the  same  way  and 
to  the  same  extent  as  a  disclosed  principal,  although  the  third 
person  supposed  he  was  dealing  with  the  agent  as  principal. 


§129]  LIABILITY  OF  PRINCIPAL  221 

The  rule  works  both  ways.  An  undisclosed  principal  may 
claim  the  benefits  of  a  contract  made  by  his  agent  in  the  course 
of  the  agency. 

Examples  .■  i .  A  business  is  conducted  in  the  name  of  A,  who  buys  goods 
of  X.  Later  X  discovers  that  P  owns  the  business.  X  may  recover  the  price 
of  the  goods  from  P. 

2.  A  business  is  conducted  in  the  name  of  A,  who  sells  goods  to  X.  The 
owner,  P,  may  recover  the  price  of  the  goods  from  X. 

2.  Exceptions.  To  these  rules  there  are  some  exceptions,  and 
a  few  of  them  may  be  noted. 

a.  If  the  principal  or  the  third  party  has  in  good  faith  settled 
his  account  with  the  agent,  he  is  no  longer  liable. 

Examples  :  3.  If  A  conducts  P's  business  in  his  own  name  and  buys  goods 
of  X,  and  A  and  P  have  an  accounting  which  includes  this  item,  X  cannot 
afterwards  sue  P. 

4.  If  under  like  circumstances  A  sells  goods  to  X,  and  X  has  paid  A  or 
otherwise  settled  with  him,  P  cannot  afterwards  sue  X. 

b.  In  contracts  under  seal  only  the  parties  named  in  the  con- 
tract can  sue  or  be  sued,  and  hence  an  undisclosed  principal  could 
neither  sue  nor  be  sued  upon  such  a  contract. 

Example.  5.  A  sealed  instrument  is  signed  "  A.  B.,  C.  D.,  E.  F.,  Trustees 
of  the  X  Church."  The  church  is  not  liable.  The  instrument  should  be  signed 
"The  X  Church,  by  A.  B.,  C.  D.,  E.  F.,  Trustees."  Had  this  been  a  simple 
contract  (not  under  seal),  the  church  could  have  been  sued  upon  it. 

r.  In  negotiable  instruments,  only  the  party  named  as  maker, 
drawer,  or  indorser  can  be  sued.  Hence,  if  an  agent  signs  such 
an  instrument  in  his  own  name,  he  alone  is  liable  upon  it.  So 
also  only  the  payee  can  sue  ;  but  this  part  of  the  rule  is  not 
important,  since  the  payee,  by  indorsing  the  instrument,  could 
confer  upon  the  undisclosed  principal  or  any  other  person  the 
right  to  sue. 

Example  0.  A  buys  goods  for  P  without  disclosing  P,  and  gives  a  promis- 
sory note  to  X's  order,  signed  "  A,  agent."  X  cannot  sue  1'  upon  this.  The 
word  "  agent "  has  no  more  effect  than  if  A  had  signed  "  A,  shoemaker,"  or 
"  A,  Republican."  These  arc  mere  words  of  description.  A  alone  is  liable. 
Had  this  been  a  nonncgotiable  instrument,  P  could  have  been  sued  upon  it. 

(i.  If,  after  discovering  the  principal,  the  third  party  unequiv- 
ocally elects   to   hold   the   agent,   he   cannot   afterwards    proceed 


222  PRIXCIPAL  AND  AGENT  [Cn.  X 

against  the  principal.  The  third  person  has  nn  option  to  hold 
the  agent  to  the  contract  made  in  the  agent's  name,  or  to  dis- 
regard the  agent  and  proceed  against  the  princijjal.  But  he 
cannot  do  both,  llr  must  elect,  and  his  election,  once  made,  is 
binding  uj:)on  him. 

130.  Frauds  by  agent.  If  in  the  course  of  an  authorized  nego- 
tiation for  the  principal  an  agent  makes  unauthorized  false  repre- 
sentations, amounting  to  fraud  or  deceit,  concerning  the  subject 
matter  of  a  contract,  the  principal  is  liable  in  the  same  way  as  if 
he  had  made  them  personally  (see  sect.  29  ante). 

If  the  agent  commits  a  fraud  for  his  own  benefit  and  not  for 
his  principal's,  but  by  means  of  instrumentalities  intrusted  to  him 
by  his  principal,  the  latter  may  be  liable. 

Examples  .•  i .  A  stock  transfer  agent  of  a  corporation  fraudulently  issues 
stock  certificates  and  sells  them  for  his  own  benefit.  In  many  American  states 
the  corporation  is  held  liable. 

2.  An  agent,  authorized  by  a  railway  company  to  receive  goods  and  issue 
bills  of  lading,  fraudulently  issues  bills  of  lading  for  wheat  where  no  wheat  is 
received,  and  sells  the  bills  of  lading  to  innocent  buyers.  In  New  York  and 
many  other  states  the  railway  is  liable,  but  England  and  some  of  our  states 
hold  otherwise. 

3.  A  is  both  telegraph  operator  and  express  agent  at  M.  He  telegraphs  X 
in  the  name  of  X's  agent,  requesting  the  transmission  of  money  by  express. 
X  sends  the  money  by  express.  The  agent  takes  it  and  absconds.  The 
telegraph  company  is  liable  to  X. 

IV,   Ll\bility  of  Agent  to  Third  Parties 

131.  Where  agent  alone  is  liable.  If  an  agent  exceeds  his 
authority  so  that  his  principal  is  not  bound,  the  agent  is  liable  to 
the  third  party  for  the  breach  of  his  warranty  of  authority.  He  is 
not  liable  on  the  contract  itself  when  that  was  made  in  the  prin- 
cipal's name.  The  agent  is  liable  for  any  fraud,  deceit,  or  other 
tort  committed  by  him  while  about  the  principal's  business. 

If  an  agent  contracts  for  a  fictitious  principal,  he  is  liable  upon 
the  contract  himself. 

If  an  agent  signs  a  sealed  instrument  or  a  negotiable  instru- 
ment in  his  own  name,  or  in  his  name  with  merely  descriptive 
matter  after  it,  he  alone  is  liable  unless  the  body  of  the  instrument 
shows  by  its  recitals  that  it  is  the  principal's  promise. 


§  132]  REVIEW  QUESTIONS  Ax\D  PROBLEMS  223 

Example.  "  We,  as  trustees  of  the  X  Church,  promise  to  pay  to  the  order 
of  G.  H.  one  hundred  dollars.  A.  B.,  C.  D.,  E.  F.,  Trustees  of  the  X  Church." 
This  binds  the  X  Church.  But  if  it  had  read,  "  We  promise  to  pay,  etc.,"  and 
had  been  signed  in  the  same  way,  the  church  would  not  have  been  hable 
(see  sect.  1 29,  par.  2,  d,  ante). 

132.  Where  both  principal  and  agent  are  bound.  In  a  contract 
made  by  an  agent  for  an  undisclosed  principal  both  are  bound ; 
that  is,  the  third  party  may  elect  to  hold  either.  Even  a  written 
contract  (other  than  a  sealed  or  negotiable  one)  signed  by  the 
agent  alone  may  be  shown  by  parol  evidence  to  be  in  fact  the 
contract  of  an  undisclosed  principal.  This  has  already  been 
sufficiently  considered. 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  116.  What  is  the  meaning  of  agency.?  Into  what  two  branches 
does  the  subject  fall.''  Explain  each.  How  is  the  relation  created.?  What  is 
the  problem  as  to  third  persons  ?  Why  is  it  difficult  1  Why  is  or  is  not  the 
principal  or  master  liable  in  each  example  given  ? 

117.  May  an  infant  appoint  an  agent.?  Is  the  appointment  voidable?  Is 
it  void.?  Same  questions  as  to  an  insane  person?  a  married  woman?  If  one 
contracts  in  behalf  of  an  unincorporated  club,  who  is  bound?  Is  a  member 
bound  who  votes  against  the  making  of  the  contract?  May  one  partner  bind 
another  by  appointing  an  agent?  May  an  agent,  by  appointing  a  subagent, 
bind  his  principal  ? 

Problem  i.  An  infant  P  authorizes  an  agent  A  by  power  of  attorney  to  sell 
and  convey  P's  real  property.  A  sells  and  conveys  P's  property.  When  P 
comes  of  age,  can  he  ratify  this  sale  and  conveyance,  or,  in  order  to  make  it 
valid,  must  he  then  execute  a  new  conveyance  ?  What  of  an  infant's  authority 
to  an  agent  to  sell  a  horse  ?  to  buy  one  ? 

Problem  2.  P  when  sane  authorizes  A  to  buy  goods  for  him.  P  becomes 
insane,  and  A  afterwards  purchases  of  X,  who  docs  not  know  of  P's  insanity. 
Is  P  bound  ? 

118.  Who  may  be  an  agent?    IIow  must  joint  agents  act?    Exception? 

119.  When  must  an  agent's  appointment  be  in  writing?  W'hcn  must  it  be 
under  seal  ?  Draw  a  power  of  attorney  to  collect  debts  and  give  receipts  for 
the  same. 

120.  What  is  ratification?  What  arc  the  essentials?  If  in  Example  i  A 
had  bought  the  book  in  his  own  name,  could  P  ratify?  Is  silence  ratification  ? 
Can  one  ratify  a  forgery  of  his  name  to  an  instrument?  How  can  one  be 
estopped  in  .such  a  case?  If  one  ratifies,  from  what  time  does  the  contract 
obligation  date?    If  one  refuses  to  ratify,  what  are  the  third  party's  rights? 


224  rRINC:il"AL  AND  AC.KNT  [Cii.  X 

rroblein  J.  A  is  the  promoter  of  an  intended  corporation.  He  makes  a 
contract  for  it.  Wiien  it  is  duly  ciiartered,  the  corporation  ralifies  the  contract. 
Is  it  liable  for  a  subsequent  breach  of  the  contract .!" 

Probletii  4.  A  without  authority  makes  a  contract  in  his  own  name,  but 
intending  it  for  the  benefit  of  P.  When  1'  hears  of  it,  he  ratifies  it.    Is  V  bound? 

l^roblcm  ^.  A  without  authority  conveyed  T's  land  to  X.  1'  received  the 
purchase  money.    X  claims  this  was  a  ratification.    Is  it  so? 

121.  What  is  a  wife's  implied  authority  as  agent?  an  infant  child's?  an 
unpaid  vendor's? 

122.  How  may  an  agency  be  terminated  by  act  of  the  paj^ties?  If  a  prin- 
cipal terminates  it,  what  are  the  rights  of  the  agent?  of  third  parties?  If  the 
agent  terminates  it  before  the  contract  expires,  what  may  he  recover  for  serv- 
ices already  rendered?  What  is  the  effect  of  the  death  of  either  party?  of 
illness  ?    Effect  of  impossibility  ? 

Problem  6.  P  authorized  A  to  sell  his  lands.  Later  he  also  authorized  B  to 
sell  them.  On  September  9  A  sold  them  to  X.  On  September  10  B  sold  them 
to  Y.    P  conveyed  to  X,  and  Y  sues  P  for  breach  of  contract.    Result? 

Problem  7.  P  authorizes  A  to  receive  payments  of  X.  P  dies.  X  pays  A, 
neither  knowing  of  P's  death.    Is  the  payment  binding  upon  P's  estate? 

123.  What  is  an  irrevocable  agency?  What  is  a  power  coupled  with  an 
interest?    Illustrate. 

Problem  S.  P  borrowed  $2000  of  A  and  gave  the  latter  a  power  to  collect 
certain  rents  and  pay  himself  from  the  proceeds.  P  died.  Was  the  agency  to 
collect  the  rents  terminated  ?  Suppose  a  tenant  had  paid  rent  to  A  after  P's 
death  ? 

124.  What  are  the  obligations  of  the  principal  to  the  agent?  What  are  an 
agent's  damages  when  the  principal  wrongfully  revokes  the  agency?  When  an 
agency  is  revoked  by  impossibility  or  by  the  death  of  the  principal,  how  much 
may  an  agent  recover  ?    What  is  reimbursement  ?    What  is  indemnity  ? 

Problem  g.  A  agrees  to  work  for  P  for  a  year  at  $20  a  month.  At  the  end 
of  four  months  A  quits  the  employment  without  cause.  How  much  may  A 
recover  of  P  ? 

Problem  10.  In  a  similar  case  P  discharges  A  without  cause  at  the  end  of 
four  months.    How  much  may  A  recover? 

125.  What  are  the  agent's  duties?  Illustrate  each.  If  an  agent  acts  for 
his  principal  and  also  for  a  third  person,  what  is  the  result  ?  If  an  agent  makes 
a  secret  profit,  what  is  the  result?  May  an  agent  delegate  his  duties?  Explain 
and  illustrate.  What  is  a  del  credere  agency?  How  does  it  differ  from  a  sale? 
What  are  the  obligations  of  a  gratuitous  agent  ? 

Problem  11.  P  directs  A  to  pay  taxes  on  P's  land.  A  neglects  to  do  so. 
The  lands  are  sold  for  taxes.  A  bids  them  in  and  takes  a  tax  deed.  Is  it  good 
against  P? 


REVIEW  QUESTIONS  AND  PROBLEMS  225 

Proble?n  12.  A  sold  for  P  certain  prize  packages  which  it  was  illegal  to 
sell,  and  received  the  money  for  them.  P  sues  A  for  the  money.  A  sets  up 
the  illegality.    Result.'' 

Problem  ij.  P  authorizes  A  to  accept  bills  of  exchange  drawn  on  P.  When 
a  bill  comes  in,  A  decides  to  accept  it  and  tells -B,  a  clerk,  to  write  the  accept- 
ance. B  writes,  "  Accepted,  P,  by  B."  Is  P  bound  .-*  How  would  it  be  if  A 
had  told  B  to  exercise  his  judgment  and  accept  bills,  and  B  had  accepted  this .'' 

126.  State  the  rules  as  to  a  principal's  liability  to  third  persons  for  the  acts 
of  his  agent.    Illustrate. 

127.  How  is  an  agent's  apparent  authority  determined.''  What  is  actual 
authority  and  how  determined .-*  What  are  incidental  powers.-'  Illustrate. 
What  are  customary  powers.''  What  are  powers  arising  from  the  conduct 
of  the  principal?  Illustrate.  What  is  the  distinction  between  general  and 
special  agents  .-•  Illustrate. 

Problem  14.  P  gives  A  general  authority  to  sell  goods.  A  sells  them  to  X 
and  warrants  them.    Is  P  bound  by  the  warranty .'' 

Problem  75.  P  directs  A  to  loan  money  and  take  a  note  and  mortgage. 
A  does  so.  The  note  and  mortgage  remain  in  A's  hands.  The  borrower 
pays  A.     Is  P  bound  by  this  payment.'' 

Proble7?i  16.  P  authorizes  A  to  make  collections.  X  gives  A  a  check  pay- 
able to  the  order  of  P.  A  indorses  the  check  in  P's  name,  obtains  the  money, 
and  absconds.    Does  the  loss  fall  upon  P  or  the  bank  t 

128.  Define  factor.  Explain  his  powers.  Define  broker.  Distinguish  from 
factor.  Define  auctioneer.  Whose  agent  is  he  ?  Define  attorney  at  law  and 
state  some  of  his  powers.    S^te  the  powers  of  a  bank  cashier. 

Problem  ij.  A  broker  is  authorized  by  P  to  sell  goods  and  sells  them  to  X. 
P  delivers  the  goods  to  X.  The  broker  then  collects  the  price  from  X  and 
absconds.    P  sues  X  for  the  price.    Can  he  recov-er.'' 

Problem  18.  P  authorized  an  auctioneer  to  sell  his  farm  for  $500  cash 
down,  balance  of  the  price  bid  in  thirty  days.  These  terms  were  publicly  stated 
at  the  time  of  the  auction.  The  auctioneer  sold  to  X  for  $3000,  and  took  X's 
check  for  the  5500.  X  had  no  funds  in  bank  to  meet  the  check,  but  two  days 
later  deposited  funds  and  the  check  was  paid  to  the  auctioneer.  Meanwhile 
I'  had  learned  of  the  transaction  and  repudiated  the  sale.  X  now  sues  P 
for   i)reach  of  contract.    Result.'' 

129.  What  is  an  undisclosed  principal  ?  State  the  general  rule  as  to  the 
liability  of  an  undisclo.sc'd  principal.  .State  the  general  rule  as  to  his  rights. 
State  the  exceptions  and  illustrate  each. 

Problem  jg.  P  owns  a  hotel.  He  conducts  it  in  the  name  of  A,  and  it 
is  supposed  that  A  is  the  proprietor.  X  sells  cigars  on  credit  to  A  for  the 
hotel.  P  has  forbidden  A  to  buy  cigars  on  credit.  Is  P  liable  to  X  for  the 
cigars .'' 


226  PRINCIPAL  AND  A(1KNT  [Cii.  X 

Problem  70.  In  the  above  case  P,  after  learning  that  A  bought  on  credit, 
settled  with  the  agent,  paying  him  in  full  for  the  cost  of  the  cigars.  Can  X 
then  recover  of  P  ? 

Problem  ji.  In  the  above  case  (Problem  19)  X,  after  learning  that  P  is 
the  true  principal,  sues  A  and  obtains  a  judgment  against  him.  This  remains 
unsatisfied,  and  he  then  sues  P.    Can  he  maintain  this  action .'' 

Problem  22.  In  the  above  case  (Problem  19)  X  warranted  the  cigars. 
They  turned  out  to  be  inferior  to  the  warranty.  Can  P  recover  against  X  for 
breach  of  the  warranty  1 

Problem  2j.  In  the  above  case  (Problem  22)  the  agent,  before  X  knows 
that  P  is  the  true  principal,  settles  with  X  for  the  breach  of  warranty.  Can 
P  now  sue  X  ? 

130.  Is  the  principal  liable  for  the  frauds  of  the  agent  committed  for  the 
principal's  benefit?  for  the  agent's  benefit.?  Illustrate. 

Problem  24.  P  authorizes  A  to  sell  his  land.  A  sells  to  X  and  fraudulently 
represents  the  land  to  be  well  timbered  and  well  watered.  When  X  discovers 
the  fraud  he  sues  P,  who  has  received  the  purchase  money  without  knowing 
of  his  agent's  fraud.    Is  P  liable  to  X  in  this  action  for  deceit.'' 

131.  How  is  an  agent  liable  to  the  third  person  upon  an  unauthorized 
contract?  How  is  he  liable  if  he  deals  in  the  name  of  a  fictitious  principal? 
How  is  he  liable  if  he  signs  in  his  own  name  a  sealed  or  negotiable  instrument  ? 

Problem  2j.  P  authorizes  A  to  issue  insurance.  A  without  authority  repre- 
sents to  X  that  he  may  keep  petroleum  upon  the  insured  premises.  X's  prem- 
ises burn.  P  successfully  defends  an  action  upon  the  policy  because  X  kept 
petroleum.  X  sues  A  for  breach  of  his  warranty  of  authority  to  make  such 
representation.    Result? 

132.  Who  are  liable  on  an  authorized  written  or  oral  contract  made  by  an 
agent  in  his  own  name  ? 


CHAPTER  XI 

MASTER  AND  SERVANT 

I.    Injuries  to  Third  Persons 

133.  Negligent  torts  by  servants.  If  in  the  conduct  of  his 
master's  business  a  servant  negUgently  injures  a  third  person 
(other  than  a  fellow  servant),  the  master  is  liable  to  the  injured 
person  ;  the  servant  is  of  course  also  liable,  because  ever}'-one 
is  liable  for  his  own  torts.  But  if  the  injury  is  due  to  some 
contributing  negligence  of  the  third  person,  he  cannot  recover 
from  either  the  master  or  the  ser\'ant. 

Examples :  i.  A  railway  engineer  negligently  runs  over  X  at  a  railway 
crossing.    The  railway  company  is  liable  to  X.    The  engineer  is  also  liable. 

2.  A  workman  negligently  allows  a  brick  to  fall  from  a  building  into  the 
street.  It  strikes  and  injures  X.  The  employer  of  the  negligent  workman  is 
liable  to  X.    The  workman  also  is  liable. 

3.  A  servant  at  a  hotel  negligently  spills  soup  upon  a  guest's  dress.  The 
hotel  keeper  is  liable  for  the  damage.    The  servant  also  is  liable. 

4.  X  negligently  fails  to  look  and  listen  at  a  railway  crossing.  The  engineer 
negligently  fails  to  sound  a  signal.  X  is  struck  and  injured  by  the  locomotive. 
He  cannot  recover,  because  of  his  contributory  negligence. 

134.  Willful  torts  by  servants.  A  master  is  liable  for  willful 
torts  committed  by  his  servant  in  the  course  of  the  employment 
and  in  the  supposed  furtherance  thereof.  If  the  servant  is  acting 
for  the  master  and  supposes,  however  mistakenly,  that  his  act 
will  further  the  master's  interests,  the  master  is  liable. 

Examples:  i.  X's  vehicle  obstructs  the  M.  Street  Railway  Company's 
track.  .S  is  motorman  on  one  of  its  cars.  S  orders  X  to  get  off  the  track. 
There  is  a  dispute  and  S  purposely  drives  his  car  against  X's  vehicle  and 
damages  it.  The  Railway  Company  is  liable  if  S  did  this  in  order  to  get  a 
clear  track  and  make  his  schedule  time.    S  also  is  liable  for  his  own  tort. 

2.  S  sells  tickets  for  the  M.  Klcvated  Railway.  X  buys  a  ticket  and  lays 
down  a  bill.  .S  gives  X  the  change  and  then  mistakenly  thinks  the  bill  is 
counterfeit  and  has  X  arrested.  The  Railway  Company  is  liable  for  false  im- 
prisonment if  S  did  this  in  order  to  get  good  money  for  the  ticket ;  but  if  S 

227  • 


228  MASTER  A\I)  SERVANT  [Ca.  XI 

dill    it   to   serve   the    public   and    punish   a  supposed   criminal,    the   Railway 
Company  is  not  liable.     In  either  case   S  is  personally  liable. 

A  public  carrier  oi  pas.scni;crs  is  liable  for  any  willful  injury 
done  to  a  passenger  l)y  one  of  its  employees,  whether  done  in 
the  supposed  dischars2;e  of  a  duty  or  out  of  personal  malice.  The 
carrier  owes  a  very  high  duty  to  passengers. 

Example  3.  A  street-car  conductor  sees  one  of  his  enemies  on  the  street  car 
and  assaults  him  to  pay  off  an  old  grudge.  The  street-car  company  is  liable. 
The  conductor  is  of  course  personally  liable. 


II.    Injuries  to  Servants 

135.  Injury  to  one  servant  by  another.  The  master  is  not 
liable  to  one  servant  for  an  injury  occasioned  by  the  negligence 
of  a  fellow  servant.  He  is  liable  for  an  injury  occasioned  by  the 
negligence  of  a  vice  principal. 

A  vice  principal  is  one  who  is  charged  by  the  master  with 
the  performance  of  any  of  these  duties :  {lx)  providing  a  safe 
place  to  work  ;  {b)  providing  safe  tools  ;  (c)  providing  a  suffi- 
cient number  of  competent  servants ;  {d)  providing  suitable 
rules  and  regulations  to  govern  the  service ;  (r)  providing 
inspection  and  repair  of  instrumentalities  ;  (/)  providing  special 
warning  of  any  extraordinary  danger.  If  one  charged  with  per- 
forming any  of  these  duties  is  negligent  in  the  performance 
thereof,  and  an  employee  is  injured  in  consequence  of  such 
negligence,  the  master  is  liable.  The  master  does  not  insure 
safety  in  these  respects ;  he  insures  that  due  care  will  be  taken. 

A  fellow  servant  is  one  who  performs  operative  acts.  If  in 
operating  machinery  or  in  any  similar  act  one  fellow  servant 
injures  another,  the  master  is  not  liable.  It  is  said  that  a  servant, 
in  entering  the  employment,  assumes  the  risk  as  to  the  negligence 
of  his  fellow  servants. 

Examples :  i.  S  and  T  are  both  employed  by  M.  S  is  told  to  repair  a 
machine  and  does  so  negligently.  The  machine  breaks  down  while  T  is 
operating  it,  and  injures  T.  M.  is  liable  to  T.  In  repairing  the  machine  S 
was  a  vice  principal. 

2.  Owing  to  the  negligence  of  S  in  operating  a  machine  T  is  injured.  M  is 
not  liable  to  T.    In  operating  the  machine  S  is  a  fellow  servant  of  T. 


§§  136,  137]  INJURIES  TO  SERVANTS  229 

3.  Owing  to  the  negligence  of  a  railway  engineer  a  train  is  derailed  and 
a  brakeman  injured.  The  railway  company  is  not  liable  to  the  brakeman.  An 
engineer  is  a  fellow  servant  of  a  brakeman ;  so  also  is  a  conductor ;  so  also 
is  a  switchman.    But  a  train  dispatcher  is  a  vice  principal. 

In  Ohio  and  some  other  states  a  superior  officer,  Hke  a  con- 
ductor or  a  manager  or  a  foreman,  is  ahvays  a  vice  principal, 
even  if  he  performs  operative  acts  ;  but  the  general  rule  is  that 
it  is  the  nature  of  the  act  and  not  the  rank  of  the  actor  that 
is  decisive.  Employers'  liability  acts  exist  in  several  states, 
enlarging  the  liability  of  the  master  to  one  servant  for  the  neg- 
ligence of  a  coser\-ant. 

136.  The  master's  nonassignable  duties.  The  duty  to  use  care 
to  furnish  safe  machinery,  safe  tools,  proper  inspection,  and  the 
like,  as  specified  in  sect.  135,  is  called  a  nonassignable  duty, 
because,  no  matter  who  is  delegated  to  perform  it,  the  master 
remains  liable  to  his  servants  for  any  negligence  in  that  regard. 

This  rule  is  qualified  by  the  further  rule  that  if  a  servant,  with 
full  knowledge  of  some  defect,  remains  in  the  employment,  he 
assumes  the  risk  as  to  the  defect  and  cannot  recover  from  the 
master  if  he  is  injured  in  consequence  of  it. 

Example  i.  S  is  told  to  operate  a  machine.  He  knows  it  is  defective.  He 
operates  it  and  is  injured  because  of  this  defect.    He  cannot  recover. 

But  if  the  master  promises  to  repair  the  defect,  the  servant 
may  remain  a  reasonable  time  without  assuming  the  risk, 

Exatnple  2.  As  above.  S  objects  to  the  machine  because  it  is  defective. 
The  master  promises  to  repair  it.  The  next  day  S  is  injured.  The  master 
is  liable  to  S. 

In  any  case  a  servant  cannot  recover  if  his  injury  is  due  to 
his  own  contributory  negligence. 

Example  3.  S,  after  the  master's  promise  to  repair,  operates  the  machine. 
He  is  injured  by  his  own  negligence  in  the  manner  of  operating  it.  He  cannot 
recover. 

137.  Employers'  liability  acts.  Statutes  called  employers' 
liability  acts  have  been  enacted  in  many  jurisdictions.  These 
laws  materially  change  the  common-law  rules  laid  down  al)ovc 
(sects.  135-136).    The  Federal  Employers'  Liability  Act  provides 


230  MASTER  AND  SERVANT  [Cii.  XI 

that  all  common  carriers  by  railroad  which  arc  cnfraged  in  inter- 
state commerce  shall  be  liable  to  employees  for  injuries  sustained 
in  the  course  of  their  employment  which  are  due  to  the  negli- 
gence of  other  employees  of  the  railroad  or  which  are  caused 
by  defects  in  engines,  cars,  track,  or  other  equipment.  This  is 
an  abolition  of  the  fellow-servant  rule.  The  statute  also  abolishes 
the  rule  that  contributory  negligence  bars  recovery  and  adopts  the 
rule  of  comparative  negligence.  If  both  employer  and  employee 
have  been  negligent,  the  employee  will  not  be  wholly  barred  from 
recovery,  but  his  recovery  will  be  reduced  by  the  jury  according 
to  the  relative  importance  of  his  negligence.  The  rule  of  assump- 
tion of  risk  is  also  partially  abolished  by  this  act,  and  the  carrier 
is  prohibited  from  exempting  itself  from  liability  for  its  negligence. 

In  at  least  thirty  states  employers'  liability  acts  have  been 
enacted,  limiting  or  abolishing  the  fellow-servant  rule,  the  rule 
of  contributory  negligence,  and  the  assumption-of-risk  rule.  Their 
variations  are  numerous,  and  it  is  impossible  to  give  them  in  detail 
here.  Some  apply  only  to  railroads  and  their  employees,  while 
others  are  concerned  with  all  employers  and  employees. 

138.  Workmen's  compensation  and  insurance  acts.  Within 
the  past  ten  years  many  legislatures  have  enacted  workmen's 
compensation  and  insurance  laws  for  the  purpose  of  providing 
financial  relief  to  workmen  injured  in  the  course  of  their  employ- 
ment, regardless  of  the  cause  of  the  injury,  unless  it  were  in- 
tentionally self-inflicted  or  in  some  cases  due  to  gross  negligence 
or  intoxication.  The  theory  of  these  acts  is  that  losses  due  to 
injuries  suffered  by  workmen  in  the  ordinary  course  of  their 
employment  ought  to  be  borne  by  the  industry,  and  ultimately 
by  the  consuming  public,  rather  than  by  the  workmen. 

The  compensation  acts  are  of  two  classes,  elective  and  com- 
pulsory. In  fourteen  states  and  two  territories ^  the  elective  system 
is  in  force  as  to  all  classes  of  employment  covered  by  the  acts. 
In  ten  states  ^  the  laws  are  elective  as  to  private  employers,  but 


1  Alaska,  Colorado,  Connecticut,  Illinois,  Kansas,  Kentucky,  Massachusetts, 
Minnesota,  Nebraska,  New  Hampshire,  Oregon,  Porto  Rico,  Rhode  Island, 
Texas,  Vermont,  and  West  Virginia. 

^  Indiana,  Iowa,  Louisiana,  Maine,  Michigan,  Montana,  Nevada,  New  Jersey, 
Pennsylvania,  and  Wisconsin. 


§138]  INJURIES  TO   SERVANTS  231 

compulsory  as  to  public  employers,  as,  for  example,  the  state, 
counties,  and  municipalities.  In  eight  states  and  one  territory,^ 
and  under  the  federal  act,  it  is  compulsory  for  all  employers  to 
abide  by  the  provisions  of  the  statutes. 

In  some  states  these  acts  apply  to  all  industries,  in  some  to 
extra-hazardous  employments  only,  while  in  others  all  occupations 
except  domestic  and  farm  labor  are  included. 

Under  the  elective  system  neither  employer  nor  employee  is 
bound  to  come  under  the  act  and  accept  its  liabilities  and  bene- 
fits, but  both  must  elect  to  do  so  before  the  act  will  apply.  In 
many  states  election  to  come  within  the  act  is  presumed  in  the 
absence  of  written  notice  to  the  contrary.  Under  the  compulsory 
system,  on  the  other  hand,  the  employer  must  accept  the  com- 
pensation law,  although  the  employee  is  allowed  to  sue  as  at 
common  law  in  some  cases,  as  in  New  York  when  the  employer 
fails  to  secure  payment  of  compensation  under  the  act. 

Under  the  elective  system  the  defenses  of  assumed  risk  and 
contributory  negligence,  and  the  fellow-servant  rule,  are  generally 
abolished,  and  suits  for  damages  outside  the  act  are  not  allowed 
after  the  workman  haS  elected  to  come  under  the  act. 

Generally,  under  all  the  compensation  statutes,  waivers  of  the 
provisions  of  the  acts  are  prohibited  and  the  employer  is  required 
to  give  proof  of  solvency  or  to  insure  against  the  risks.  The  em- 
ployee is  not  eligible  for  compensation  unless  his  disability  con- 
tinues for  a  period  of  some  appreciable  length,  the  time  ranging 
from  six  days  to  three  weeks.  The  amount  which  the  employee 
is  entitled  to  obtain  for  any  given  injury  is  fixed  by  these 
statutes.  These  sums  vary  greatly,  but  are  usually  a  certain 
proportion  of  the  employee's  weekly  salary  for  a  given  period. 
Thus,  in  New  York,  if  the  employee  is  killed,  the  employer 
is  required  to  pay  reasonable  funeral  expenses,  not  exceeding 
$100,  and  to  the  widow  30  per  cent  of  the  deceased's  wages 
until  the  death  or  remarriage  of  the  widow,  and  10  per  cent 
additional  for  each  child  under  eighteen  years,  the  total  weekly 
payments,  however,  not  to  exceed  two  thirds  of  the  weekly 
wages   of   the   deceased. 

1  Arizona,  ralifornia,  Hawaii,  Maryland,  New  ^■<)rk,  Ohio,  Oklahoma,  Wash- 
ington, and  Wyoming. 


232  MASTl'.R   AND   SERVANT  [Cii.  XI 

Dis[Hitcs  under  the  acts  arc  sometimes  settled  by  the  courts, 
but  more  often  by  an  industrial  commission  having  charge  of  the 
enforcement -of  the  statutes. 

The  states  having  the  workmen's  compensation  statutes  are 
divided  into  two  classes  with  respect  to  the  question  of  securing 
to  the  workmen  the  payments  due  them  under  the  acts.  In 
twenty-five  states  and  two  territories  ^  the  employer  must  either 
secure  the  payment  of  the  compensation  by  insurance  or  furnish 
evidence  of  his  financial  responsibility.  In  seven  states  and  one 
territory  2  the  employer  is  not  compelled  to  insure  or  make  other 
provision  for  securing  the  payments,  but  he  may  do  so  if  he  desires. 

The  methods  of  insurance  are  various.  In  sixteen  states  and 
one  territory  there  are  insurance  funds  operated  wholly  or  in 
part  by  the  state.  In  four  states  and  one  territory-'  the  employer 
is  compelled  to  insure  in  a  fund  administered  wholly  by  the 
state.  In  nine  states'*  a  state-operated  insurance  company  is 
maintained  in  competition  with  private  insurance  companies.  In 
three  states  ^  insurance  is  compulsory  on  the  part  of  the  employer 
either  in  a  private  company  or  in  an  insurance  fund  operated  by 
the  state  and  the  employers  in  combination.  In  sixteen  states  and 
two  territories*'  there  are  no  insurance  funds  operated  in  whole 
or  in  part  by  the  state,  and  the  employer,  if  he  insures  his  risk 
under  the  workmen's  compensation  acts,  either  voluntarily  or 
compulsorily,  must  do  so  in  a  private  insurance  company. 

1  Colorado,  Connecticut,  Hawaii,  Illinois,  Indiana,  Iowa,  Kentucky,  Maine, 
Maryland,  Massachusetts,  Michigan,  Montana,  Nevada,  New  Hampshire,  New 
York,  Ohio,  Oklahoma,  Oregoil^  Pennsylvania,  Porto  Rico,  Rhode  Island,  Texas, 
Vermont,  Washington,  West  Virginia,  Wisconsin,  and  Wyoming. 

^  Alaska,  Arizona,  California,  Kansas,  Louisiana,  Minnesota,  Nebraska,  and 
New  Jersey. 

^  Nevada,  Oregon,  Porto  Rico,  Washington,  and  Wyoming. 

*  California,  Colorado,  Maryland,  Michigan,  Montana,  New  York,  Ohio,  Penn- 
sylvania, and  West  Virginia. 

'  Kentucky,  Massachusetts,  and  Texas. 

6  Alaska,  Arizona,  Connecticut,  Hawaii,  Illinois,  Indiana,  Iowa,  Kansas,  Loui- 
siana, Maine,  Minnesota,  Nebraska,  New  Hampshire,  New  Jersey,  Oklahoma, 
Rhode  Island,  Vermont,  and  Wisconsin. 


REVIEW  QUESTIONS  AND  PROBLEMS  233 

REVIEW  QUESTIONS  AND  PROBLEMS 

Section  133.  When  is  a  master  liable  for  negligent  injuries  by  his 
servant  to  a  third  person  ?    What  will  bar  the  action  ? 

134.  When  is  a  master  liable  for  willful  injuries  inflicted  by  his  servant 
upon  a  third  person?    What  is  the  rule  as  to  public  carriers? 

Problem  I.  B,  a  boy  of  twelve,  steals  a  ride  on  a  freight  train.  The  brake- 
man  discovers  him  and  pushes  him  off  while  the  train  is  in  motion,  and  the 
boy  is  injured.    Is  the  railway  company  liable? 

Problem  2.  B  is  employed  to  repair  electric  lights  in  X's  building.  While 
he  is  on  a  stepladder  X's  janitor,  who  is  sweeping  the  room,  pushes  the  ladder 
intentionally  and  B  falls  and  is  injured.     Is  X  liable? 

135.  Who  is  a  vice  principal?  Who  is  a  fellow  servant?  Is  a  superior 
officer  a  vice  principal?  What  is  the  usual  test  as  to  the  master's  liability 
to  one  employee  for  a  negligent  injury  by  another  employee?  What  is  the 
purpose  of  employers'  liability  acts? 

Problem  j.  Owing  to  the  negligence  of  a  switchman  a  train  is  derailed 
and  the  engineer  injured.  Is  the  railway  company  liable  to  its  engineer  for 
the  negligence  of  its  switchman  ? 

Problem  4.  B  was  a  laborer  in  X's  factory.  C  was  superintendent  of 
the  factory.  B  was  lifting  a  flywheel  of  an  engine  off  from  its  center,  when 
C  negligently  turned  on  the  steam  and  started  the  wheel,  injuring  B.  Is  X 
liable  to  B  ? 

Problem  j.  A  workman  in  the  X  Railway  Company's  repair  shops  negli- 
gently repairs  a  locomotive  boiler.  When  it  is  used  it  explodes  and  injures  an 
engineer.    Is  the  railway  company  liable? 

136.  What  are  the  master's  nonassignable  duties?  How  may  the  risk  as 
to  these  be  shifted  to  the  employee  ?  What  is  the  effect  of  a  promise  to  repair 
a  defect  ?    What  is  the  effect  of  contributory  negligence  ? 

Problem  6.  B  was  X's  domestic  servant,  and  X  agreed  to  furnish  board 
and  lodging.  The  roof  over  B's  room  leaked.  X  promised  to  repair  the  roof. 
B  stayed  and  owing  to  the  leak  took  cold  and  was  ill.    Is  X  liable  to  B  ? 

137.  What  arc  the  employers'  liability  acts?  Is  one  in  force  in  your  state? 
How  do  they  change  the  common-law  rules  regarding  the  master's  liability 
to  his  servant  for  injuries? 

138.  What  are  the  workmen's  compensation  laws?  Is  one  in  force  in 
your  state  ?  When  is  such  a  law  elective  ?  When  compulsory  ?  What  arc  the 
rights  of  a  workman  under  such  a  law  when  he  is  injured?  Are  all  industries 
included  within  these  laws?  May  an  employee  obtain  damages  in  the  courts 
in  addition  to  what  he  secures  under  the  compensation  laws?  What  arc  the 
compulsory  and  elective  insurance  systems  provided  by  some  statutes? 


PART  V.    BUSINESS  ASSOCIATIONS 
CHAPTER  XII 

PARTNERSHIPS  AND  JOINT-STOCK  COMPANIES 

139.  Forms  of  conducting  business.  Business  may  be  con- 
ducted by  a  sole  trader,  or  by  a  partnership,  or  by  a  joint-stock 
company,  or  by  a  corporation. 

A  sole  proprietor  or  trader  is  one  who  conducts  his  business 
in  person  or  through  agents,  without  admitting  anyone  else  to 
share  in  the  profits.  He  alone  owns  the  property  embarked  in 
the  business ;  he  alone  has  a  decisive  voice  in  the  management 
of  the  business ;  and  he  alone  is  liable  for  debts  and  entitled 
to  credits.  He  may,  of  course,  have  agents  to  whom  he  intrusts 
many  important  matters,  but  they  are  his  employees  and  are 
responsible  to  him  alone. 

It  is  the  combination  of  persons  in  business  that  calls  for 
special  consideration. 

1.  Partnerships.  In  order  to  increase  capital  and  make  it  pos- 
sible to  do  a  larger  business,  two  or  more  persons  may  combine 
and  do  business  together  as  one  firm.  A  partnership  involves 
a  high  degree  of  confidence  in  the  ability,  fidelity,  and  integrity 
of  one's  partners,  without  relieving  one  of  personal  liability  to 
third  persons  for  contract  obligations  and  torts.  The  partnership 
has  three  important  characteristics  :  {a)  the  death  or  retirement 
(jf  one  partner  dissolves  the  firm  ;  (/?)  each  partner  is  an  agent 
for  the  firm  ;  {c)  each  partner  is  individually  liable  for  the  debts 
of  the  firm. 

2.  Joint-stock  companies.  The  joint-stock  company  is  a  large 
partnership  in  which  the  interests  are  represented  by  shares  of 
stock,  as  in  a  corporation.  It  differs  from  a  partnership  in  that 
the  death  or  retirement  of  a  shareholder  docs  not  dissolve  the  com- 
pany and  in  that  a  shareholder  is  not  an  agent  of  the  company 

.235 


236  TAR  TNKRSI  Ill's  [Cm.  XII 

unless  duly  elected  or  a]ipointed  as  such.  It  is  like  a  partner- 
ship in  that  each  niembci"  is  incHvidually  Hable  for  the  debts 
of  the  company. 

3.  Corporations.  A  corporation  is  a  distinct  legal  entity  inde- 
pendent of  its  stockholders.  Partnerships  and  joint-stock  com- 
panies are  formed  by  the  agreement  of  the  members  and  require 
no  statutory  authorization.  A  corporation  is  the  creature  of 
statute  and  is  by  statute  given  a  legal  being  and  invested  with 
legal  powers  as  a  separate  entity.  Title  to  property  vests  in  it, 
not  in  its  members  ;  it  acts  through  its  agents  as  a  legal  person ; 
it  is  liable  for  its  debts  and  torts,  and  no  liability  (unless  expressly 
fixed  by  statute)  rests  upon  its  members.  The  last  feature  is 
highly  important.  Persons  may  invest  money  in  a  corporation 
without  becoming  individually  liable  for  the  debts  of  the  corpora- 
tion, while  in  a  partnership  or  joint-stock  company  each  partner 
or  shareholder  is  individually  liable. 

Statutes,  of  course,  may  and  often  do  modify  these  results.  Thus  we  have 
full-liability  corporations  authorized  in  some  states,  while  we  also  have  limited 
partnerships  in  some.  In  the  full-liability  corporation  each  shareholder  is 
individually  liable,  while  in  the  limited  partnership  a  limited  partner  is  not  in- 
dividually liable  beyond  a  specified  amount.  In  some  corporations  the  statutes 
make  shareholders  individually  liable  to  a  limited  amount,  but  the  type  is  as 
stated  above. 

I.   Partnerships 

140,  What  constitutes  a  partnership.  A  partnership  may  be 
general  or  limited,  and  partners  may  be  real  or  ostensible,  active 
or  dormant. 

I.  General pajincrships.  A  general  partnership  is  a  voluntary 
association  of  two  or  more  persons  under  an  agreement  to 
carry  on  in  common,  as  if  they  were  one  person  or  an  entity, 
a  business  or  occupation,  and  to  share  as  common  owners  the 
profits  of  the  enterprise.  A  partnership  agreement  need  not  be  in 
writing.  It  usually  is  in  writing,  however,  and  the  document  is 
called  the  Articles  of  Partnership  (sec  page  244  post). 

The  mere  sharing  of  profits  is  not  a  conclusive  test  of  the 
existence  of  a  partnership,  although  it  is  strong  evidence  of  it ; 
an  agreement  to  share  both  profits  and  losses  is  still  stronger 
evidence.    It  is  often  difficult  to  decide  whether  or  not  a  particular 


§  140]  WHAT  CONSTITUTES  237 

agreement  constitutes  a  partnership.  In  general  it  may  be  said 
that  there  must  be  a  community  of  interest  and  control  in  carry- 
ing on  a  business  by  which  each  is  usually  agent  for  the  others 
and  under  which  there  is  a  division  of  profits.  This  is  a  highly 
technical  subject,  and  it  is  impossible  to  treat  it  here  in  detail. 

Two  persons  may  be  partners  as  to  third  persons  while  by  force 
of  the  agreement  between  themselves  they  are  not  partners  as  to 
each  other.  W'c  are  now  chiefly  concerned  with  the  problem 
whether  they  are  partners  as  to  third  persons. 

Examples  .•  i .  A  and  B  agree  to  carry  packages,  etc.  for  hire.  A  is  to 
furnish  horse  and  cart  and  to  give  his  services.  A  is  to  receive  a  fixed  sum. 
They  are  to  divide  the  expenses  and  to  share  the  profits  over  and  above 
A's  fixed  salar)'.  This  is  a  partnership.  They  are  carrying  on  a  business 
in  common,  with  a  view  to  profits.  One  may  in  such  case  be  paid  specially 
for  services. 

2.  An  owner  of  a  farm  lets  it  on  shares  under  an  agreement  to  take  one 
half  the  products  of  the  farm  as  rent.  This  is  not  a  partnership,  but  a  lease, 
with  an  uncertain  and  contingent  rental. 

3.  A  manufacturer  engages  an  agent  to  sell  goods,  agreeing  to  give  him 
one  third  of  the  net  profits  on  any  sales  made  by  him.  This  is  not  a  partner- 
ship, but  an  agency.  The  agent  does  not  carry  on,  in  common  with  the 
manufacturer,  the  business  of  making  and  vending  the  goods. 

4.  M  furnishes  capital  to  start  a  retail  store.  N  puts  in  his  services  in 
managing  the  business.  They  agree  to  share  the  profits.  This  is  a  partner- 
ship.   They  carry  on  a  business  in  common,  with  a  view  to  profits. 

5.  M  and  N  each  put  in  services  to  carry  on  in  common  a  law  business, 
with  a  view  to  profits  which  they  are  to  share.    This  is  a  partnership. 

2,  Ostensible  fartner.  If  a  man  holds  himself  out  as  a  partner 
or  permits  others  to  hold  him  out  as  a  partner,  when  in  fact  he  is 
not,  he  becomes  liable  as  partner  to  third  persons  who  deal  with 
the  supposed  firm  relying  upon  this  appearance  of  partnership. 

Examples:  6.  M  and  N  dissolve  partnership.  M  allows  his  name  to 
remain  over  the  door  of  the  establishment  and  upon  the  letterheads  used  in 
the  business.  X  sells  goods  to  the  supposed  firm,  believing  M  to  be  still  a 
partner.  X  may  hold  M  liable  for  the  price  of  the  goods.  M  is  estopped  by 
his  conduct  to  deny  that  he  is  a  partner.  He  should  give  notice  to  former 
customers  of  his  withdrawal  from  the  partnership. 

7.  W  introduced  Y  to  X  as  the  moneyed  partner.  Y  was  not  a  partner, 
but  he  did  not  deny  W's  statement.  X  trusted  to  this  representation  and 
suffered  loss.  Y  is  liable.  He  is  tstf)pped  to  deny  that  he  was  a  partner.  "  If 
a  man  won't  speak  when  he  should,  he  shan't  when  he  would." 


238  rARrNKKSlIll'S  L<^"X1I 

3.  Dormant  partner.  A  dormant  jxutncr  is  one  who  is  un- 
known as  a  partner.  He  occuj^ics  much  the  same  position  as 
an  undisclosed  principal.  He  is  liable  on  llie  lirm  contracts  when 
discovered,  and  lie  is  entitled  as  a  jxutner  to  the  beneiit  of  them. 

4.  Limited  partnerships.  These  exist  only  by  force  of  statute. 
They  are  jxirtnerships  in  which  one  or  more  of  the  partners  are 
not  liable  for  partnership  debts  beyond  the  sum  each  has  con- 
tributed to  the  capital.  Such  ixirtnershii)s  must  have  at  least  one 
general  partner  whose  liability  is  unlimited.  The  general  partners 
manage  the  business,  sharing  the  profits  with  the  limited  partners. 
The  statutes  prescribe  how  such  a  partnership  may  be  formed, 
and  the  statutes  must  be  strictly  followed  ;  any  violation  of  them 
will  render  the  concern  a  general  partnership.  The  theory  is  that 
it  is  a  general  partnership  except  so  far  as  the  statute,  duly  com- 
plied with,  renders  it  a  limited  partnership.  These  partnerships 
have  never  been  authorized  in  England. 

5.  WJio  may  he  a  partner.  Any  person  who  can  make  con- 
tracts may  become  a  party  to  a  partnership  contract.  By  modern 
statutes  married  women  may  make  contracts  and  hence  may 
become  partners,  although  some  states  do  not  permit  a  married 
woman  to  become  a  partner  with  her  husband.  Infants  may 
become  partners,  but  the  contract  is  voidable  at  the  will  of  the 
infant.  So  far,  however,  as  an  infant  has  actually  put  his  property 
into  a  partnership,  he  cannot  withdraw  it  to  the  prejudice  of  credi- 
tors. A  corporation  cannot  become  a  partner  unless  permitted  to 
do  so  by  its  charter. 

141.  Rights  and  duties  of  partners  as  to  each  other.  Each  part- 
ner is  bound  to  exercise  toward  his  associates  in  the  partnership 
the  highest  good  faith.    He  can  make  no  secret  profits. 

Examples :  i.  A  and  B  are  partners  in  a  grocery.  A  is  individually  a 
dealer  in  sugar.  A  without  B's  knowledge  sells  sugar  to  the  firm  at  a  profit. 
A  must  share  this  profit  with  B. 

2.  A,  B,  and  C  as  partners  are  lessees  of  a  store.  When  the  lease  expires 
A  renews  it  in  his  own  name.  A  is  held  a  trustee  of  this  lease  for  the  benefit 
of  the  partnership. 

Each  partner  is  bound,  unless  otherwise  stipulated,  to  use  due 
diligence  in  the  conduct  of  the  business,  and  can  claim  no  com- 
pensation except   his  share  of  the   profits.     But  if  one  partner 


§142]  POWERS  OF  PARTNERS  239 

willfully  neglects  the  business  and  throws  all  the  labor  upon 
another,  the  active  partner  may  be  allowed  compensation,  at  the 
discretion  of  a  court,  upon  a  final  accounting. 

Each  partner  may  claim  the  right  to  take  part  in  the  business, 
and  each  is  entitled  to  have  the  business  conducted  according  to 
the  terms  of  the  agreement.  No  change  can  be  made  in  the 
nature  of  the  business,  and  no  new  partner  can  be  admitted,  with- 
out the  consent  of  each  ;  but  as  to  incidental  matters  a  majority 
may  rule. 

If  the  partnership  is  for  a  definite  period,  a  withdrawal  of  one 
partner  before  the  expiration  of  the  period,  without  the  consent 
of  the  others,  is  a  breach  of  contract  for  which  they  may  recover 
damages.  If  the  partjiership  is  at  will,  a  partner  may  retire  at 
any  time.  One  partner  cannot  be  expelled  by  the  others.  If  a 
partner  sells  his  interest,  the  buyer  gets  only  the  seller's  share 
of  such  interest  as  remains  after  the  firm  creditors  are  paid  and 
the  partnership  is  wound  up. 

Each  partner  is  entitled  to  an  accounting  of  profits.  No  action 
at  law  can  ordinarily  be  maintained  by  one  partner  against  the 
others,  but  an  accounting  in  equity  may  be  had.  If  one  has  paid 
more  than  his  share  of  expenses,  he  is  entitled  to  contribution 
from  the  others. 

142.  Powers  of  partners.  Each  partner  is  an  agent  for  the 
others  in  the  conduct  of  firm  business,  and  the  partnership  is 
bound  by  any  contract  made  by  a  partner  within  the  scope  of  his 
authority.  So  extensive  are  the  powers  of  each  partner  that  one 
ought  not  to  form  a  partnership  with  another  unless  he  has  the 
utmost  confidence  in  that  other's  integrity  and  judgment.  The 
following  are  some  of  the  powers  possessed  by  a  partner  in  a 
trading  partnership. 

1 .  To  sell  or  mortgage  any  personal  property  belonging  to  the 
firm,  and  even  to  dispose  of  the  entire  stock  at  one  sale  ;  but 
not  to  sell  real  property,  because  the  conveyance  must  be  by  all 
the  partners  or  by  one  authorized  by  power  of  attorney  from 
the  others  ;  and  not  to  transfer  firm  property  in  payment  of  his 
individual  debt. 

2.  To  purchase  any  goods  dealt  in  by  the  firm  or  usually 
employed  in  such  a  business,  but  not  other  or  different  goods ; 


240  PAR  TNERSHIPS  [Cn.  XII 

a    i;TOCcry    partnershij)   would    nol    carry   any    implied    power   to 
purchase  shoes. 

3.  To  receive  payment  of  debts  due  the  firm  and  give  receipts. 

4.  To  make,  accept,  and  indorse  negotiable  instruments  in  the 
name  of  a  trading;  firm,  that  is,  a  firm  that  buys  or  sells ;  but  in 
a  nontrading-  partnership,  as  a  law  firm,  a  hotel  firm,  or  a  mining 
firm,  a  partner  does  not  possess  this  implied  power. 

5.  To  borrow  money  on  the  credit  of  a  trading  firm  and  give 
security  by  pledge  or  mortgage  upon  the  firm  property,  but  not 
in  the  case  of  a  nontrading  firm. 

6.  To  engage  agents  and  servants  for  the  conduct  of  the 
business. 

The  following  are  some  of  the  powers  wbich  a  partner  may  not 
exercise  without  the  consent  of  his  copartners. 

1.  To  bind  the  firm  by  deed. 

2.  To  bind  the  firm  by  a  guaranty  of  his  own  or  another's  debt. 

3.  To  bind  the  firm  by  a  submission  to  arbitration  or  by  a 
confession  of  judgment. 

4.  To  assign  the  entire  firm  property  to  pay  the  firm  debts  un- 
less the  other  partners  are  inaccessible  and  the  matter  is  urgent. 

After  the  dissolution  of  a  firm  some  powers  remain  in  each 
partner  for  the  purpose  of  winding  up  its  affairs.  A  partner 
may  still  sell  property  and  receive  and  pay  debts.  He  cannot 
make  new  contracts  or  issue  negotiable  instruments,  although  he 
may  inderse  an  instrument  "  without  recourse  "  in  order  to  sell 
or  collect  it. 

143.  Liabilities  of  partners.  The  obligations  of  a  partnership 
are  the  joint  obligations  of  its  members ;  that  is,  the  action  to 
enforce  it  is  brought  against  all  jointly.  But  although  the  creditor 
brings  an  action  for  his  debt  against  all  the  members  of  the  part- 
nership jointly,  and  judgment  is  entered  against  them  jointly,  he 
may  satisfy  his  judgment  out  of  the  individual  property  of  one 
partner,  and  is  not  bound  to  levy  upon  the  joint-partnership 
property.  If  creditors  do  exhaust  the  partnership  property,  they 
may  then  go  against  the  individual  property  of  the  partners  to 
make  up  any  deficiency.  A  partner  who  thus  satisfies  a  firm 
debt  out  of  his  property  is  entitled  to  contribution  from  his 
fellow  partners. 


§144J  RIGHTS  OF  CREDITORS  241 

An  outgoing  partner  remains  liable  to  creditors  for  debts  con- 
tracted while  he  was  a  partner,  unless  they  release  him.  An  incom- 
ing partner  is  not  liable  for  debts  contracted  before  he  became  a 
member  of  the  firm,  unless  he  assumes  and  agrees  to  pay  them, 

Partrfers  are  liable  for  torts  committed  by  a  copartner  or  a  serv- 
ant in  the  course  of  the  firm  business.  Such  liability  is  joint  and 
several ;  that  is,  the  action  may  be  against  all  jointly  or  against 
one  or  against  several. 

144.  Rights  and  remedies  of  creditors.  A  partner  may  be  liable 
to  creditors  of  the  firm  of  which  he  is  a  member  and  also  liable 
to  individual  creditors ;  he  has  partnership  property  and  also 
separate  property.  The  problem  arises  as  to  the  rights  of  the 
two  classes  of  creditors  in  the  two  classes  of  property. 

1.  Firvi  creditors.  Firm  creditors  have  a  right  to  have  the 
partnership  property  applied  first  to  the  payment  of  the  partner- 
ship debts.  An  individual  creditor  of  a  partner  cannot  attach  the 
partner's  interest  in  the  partnership  to  the  prejudice  of  the  part- 
nership creditors.  After  the  firm  creditors  are  paid,  the  separate 
creditors  of  a  partner  are  entitled  to  any  surplus  belonging  to  him. 

Examples  :  i.  A  and  B,  partners  in  a  grocery,  purchase  flour  of  X,  and 
A  purchases  a  watch  of  Y.  Y  obtains  judgment  against  A  for  the  watch,  and 
levies  upon  A's  interest  in  the  partnership.  X  afterwards  obtains  judgment 
against  A  and  B  for  the  flour,  and  levies  upon  the  partnership  property.  Y's 
attachment  is  not  good  as  against  X's.  Y  can  obtain  any  interest  remaining 
in  A  after  X's  judgment  is  satisfied. 

2.  In  payment  for  the  watch,  A  turns  over  to  Y  a  horse  and  wagon  belong- 
ing to  the  firm.  If  Y  knew  this  was  firm  property,  he  cannot  hold  it  against 
firm  creditors.  If  he  took  it  believing  it  to  be  A's,  the  courts  differ  as  to 
whether  the  firm  creditors  can  recover  A's  interest  in  it. 

2.  Separate  creditors.  The  weight  of  authority  is  in  favor  of 
the  converse  of  this  rule,  namely,  that  the  separate  creditors  of 
a  partner  are  entitled  to  be  paid  first  out  of  his  separate  estate. 
After  the  separate  creditors  arc  paid,  the  partnership  creditors 
are  entitled  to  the  surplus. 

Examples :  3.  A  and  B,  partners,  arc  insolvent.  They  owe  X  j?  15,000. 
The  partnership  property  is  valued  at  $10,000.  A's  separate  property  is  valued 
at  S6000,  and  he  owes  Y  $4000.  B  has  no  separate  property.  Y  will  be  paid 
in  full  out  of  A's  .separate  property.  .X  will  get  the  $10,000  of  joint  property 
and  the  surplus  of  $2000  from  A's  separate  estate. 


242  PARrNERSllirS  [Cii.  XII 

4.  As  above.  A  and  B  owe  X  ^7000.  A  owes  Y  $14,000.  \  will  be  paid 
in  full.  V  will  get  the  f 6000  from  A's  separate  estate  and  A's  portion  of  the 
surplus  of  53000  from  the  joint  properly  after  X  is  paid  in  full. 

These  rules  are  thus  stated  :  The  joint  estate  is  applied  to 
the  payment  of  joint  debts,  and  the  separate  estate  to  the  pay- 
ment of  separate  debts,  any  surplus  from  either  estate  being 
carried  over  to  the  other  if  necessary.  Hut  this  applies  only 
when  there  are  partnership  assets.  If  there  are  no  partner- 
ship assets,  the  firm  creditors  share  equally  with  the  individual 
creditors. 

145.  Dissolution.  A  partnership  may  be  dissolved  in  conse- 
quence of  the  happening  of  any  of  the  following  events  : 

1.  By  the  withdrawal  of  a  partner.  If  the  term  is  indefinite,  a 
partner  may  withdraw  at  will.  If  the  partnership  is  for  a  definite 
period,  the  withdrawal  of  a  partner  before  the  expiration  of  the 
period  subjects  him  to  an  action  for  damages,  but  the  partnership 
is  dissolved. 

2.  The  alienation  of  a  partner's  interest  works  a  dissolution, 
but  the  remaining  partner  may  form  a  new  partnership  with  the 
purchaser. 

3.  The  bankruptcy  of  a  partner  works  a  dissolution  unless 
otherwise  agreed. 

4.  The  bankruptcy  of  a  firm  works  a  dissolution, 

5.  The  death  of  a  partner  works  a  dissolution  unless  other- 
wise agreed.  Title  to  partnership  property  remains  in  the  surviv- 
ing partners  for  the  purpose  of  winding  up  the  partnership.  They 
must  first  pay  the  firm  debts  and  then  distribute  the  remainder, 
accounting  to  the  estate  of  the  deceased  partner  for  his  share. 
They  alone  sue  or  are  sued  upon  firm  accounts.  But  if  the  firm 
assets  are  insufficient  to  pay  the  firm  debts,  recourse  may  be  had 
against  the  estate  of  the  deceased  partner  as  well  as  against  the 
estates  of  the  survivors. 

6.  If  the  partners  are  subjects  and  residents  of  different 
countries,  and  their  respective  countries  declare  w^ar  against  each 
other,  this  works  a  dissolution  of  the  partnership. 

7.  A  court  may  decree  a  dissolution  for  the  misconduct  or 
insanity  of  a  partner  or  upon  a  showing  that  the  business  is  carried 
on  at  a  loss. 


§146]  JOINT-STOCK  COMPANIES  243 

Upon  a  dissolution  there  should  be  notice  to  third  persons,  in 
order  that  each  partner  may  be  protected  against  further  contracts 
made  in  the  firm  name.  Special  notice  should  be  given  to  those 
accustomed  to  deal  with  the  firm,  and  general  notice,  by  publica- 
tion in  a  newspaper,  to  the  public  at  large.  Existing  creditors 
must  be  paid  before  the  firm  assets  are  divided. 

Sur\iving  partners  have  power  to  wind  up  the  affairs  of  a 
partnership  after  dissolution.  The  representatives  of  a  deceased 
partner,  or  an  assignee  of  a  bankrupt  partner,  cannot  interfere 
except  to  protect  the  rights  of  the  deceased  or  bankrupt  partner. 

The  property  may  be  sold  if  necessar)^  The  good  will  is  a 
property  that  should  be  sold  if  it  has  pecuniary  value  ;  the  pur- 
chaser acquires  the  right  to  carry  on  the  business  under  the  old 
name,  with  himself  named  as  successor  to  that  business. 

Upon  the  dissolution  of  a  partnership,  if  there  is  a  loss,  it  must 
be  paid  first  out  of  profits,  next  out  of  capital,  and  lastly,  if  neces- 
sary, by  the  partners  individually  in  the  proportion  in  which  they 
were  entitled  to  share  profits.  If  there  is  a  gain,  the  assets  should 
be  used  first  in  paying  the  debts  and  liabilities  of  the  firm  to  per- 
sons who  are  not  partners  therein ;  secondly,  in  paying  to  each 
partner  what  is  due  to  him  from  the  firm  for  advances  as  dis- 
tinguished from  capital ;  thirdly,  in  paying  to  each  partner  ratably 
what  is  due  from  the  firm  to  him  in  respect  of  capital  ;  fourthly, 
the  ultimate  residue  should  be  divided  among  the  partners  in  the 
proportion  in  which  profits  are  divided. 

II.    Joint-Stock  Companies 

146.  How  distinguished  from  ordinary  partnerships.  Joint- 
stock  companies  are  large  partnerships  in  which  the  capital  is 
divided  into  shares  and  each  partner's  interest  is  represented 
by  his  ownership  of  these  shares.  Such  partnerships  are  legal 
at  common  law,  but  they  have  very  generally  been  regulated  by 
statutes. 

These  companies  differ  from  ordinary  partnerships  in  the 
following  respects  : 

I.  They  are  not  dissolved  i)y  the  same  causes.  The  shares  arc 
transferable.    If  a  shareholder  dies,  his  shares  pass  to  his  estate ; 


244  PARTNERSHIPS  [Cii.  XII 

if  he  becomes  bankrupt,  his  sliarcs  pass  to  his  assi<;ncc  ;  if  he 
sells  his  shares,  the  transferee  succeeds  to  his  rights.  There 
may  be  the  withdrawal  of  ixntners  and  tlie  introduction  of  new 
partners  without  a  dissolution  of  the  conii)an\'. 

2.  The  shareholders  do  not  all  i)articipate  in  the  manap;cmcnt, 
but  elect  directors  or  other  officers  wlio  conduct  the  business. 
Members  who  are  not  officers  have  no  authority  to  bind  the 
company.    The  articles  of  association  usually  regulate  this. 

147.  How  like  ordinary  partnerships.  Joint-stock  companies 
are  like  ordinary  partnerships  in  the  following  respects  : 

1.  Each  member  is  personally  liable  for  the  debts  and  contracts 
of  the  company.  If  he  sells  his  shares  he  remains  liable  for 
debts  contracted  while  he  owned  them. 

2,  Unless  othcrw^ise  provided  by  statute,  all  the  members  must 
join  in  an  action  by  the  company,  and  as  many  as  the  creditor 
wishes  to  hold  must  be  joined  in  an  action  against  the  company. 
By  statute  in  New  York  and  some -other  states,  such  a  joint-stock 
company  may  sue  or  be  sued  in  the  name  of  its  president, 
treasurer,  or  other  designated  officer  represe'nting  all  the  members. 

Partnersiup  Agreement 

Articles  of  Agreement,  made  the  first  day  of  May,  one  thousand  nine 
hundred  and  thirteen,  between  George  Rice,  of  the  city  of  Albany,  county  of 
Albany,  state  of  New  York,  and  Alfred  Post,  of  the  same  place, 

WITNESSETH,  as  foilows  : 

I.  The  said  parties  above  named  have  agreed  to  become  partners  in  busi- 
ness, and  by  these  presents  do  agree  to  be  partners  together  under  and  by  the 
name  or  firm  of  Rice  and  Post,  at  the  said  city  of  Albany,  in  the  dry  goods 
business,  buying  and  selling  all  sorts  of  goods,  wares,  and  merchandise  to  the 
said  business  belonging.  The  partnership  to  commence  on  the  first  day  of 
June,  191 3,  and  to  continue  ten  years. 

II.  To  that  end  and  purpose  the  said  George  Rice  has  contributed  the  sum 
of  five  thousand  dollars  ($5000)  in  cash,  and  the  said  Alfred  Post  has  con- 
tributed the  lease  of  the  store  at  iio  Main  Street,  in  the  said  city  of  Albany, 
to  be  occupied  by  them,  and  the  stock  of  goods  and  good  will  of  the  business 
there  heretofore  carried  on  by  him,  which  are  together  estimated  and  valued 
by  the  parties  at  the  like  sum  of  five  thousand  dollars  ($5000),  the  capital  stock 
so  formed  to  be  used  and  employed  in  common  between  them,  for  the  support 
and  management  of  the  said  business,  to  their  mutual  benefit  and  advantage. 

III.  At  all  times  during  the  continuance  of  their  partnership  they  and  each 
of  them  will  give  their  attendance,  and  to  the  utmost  of  their  skill  and  power 


§147]  PARTx\ERSHIP  AGREEMENT  245 

exert  themselves  for  their  joint  interest,  profit,  benefit,  and  advantage,  and 
truly  buy,  sell,  and  merchandise  with  their  joint  stock,  and  the  increase  thereof, 
in  the  business  aforesaid.  And  they  shall  and  will  at  all  times  during  the  said 
partnership  bear,  pay,  and  discharge  equally  between  them  all  rents  and  other 
expenses  that  may  be  required  for  the  support  and  management  of  the  said 
business ;  and  all  gains,  profit,  and  increase  that  shall  come,  grow,  or  arise 
from  or  by  means  of  their  said  business  shall  be  divided  equally  between  them 
on  the  first  day  of  June,  September,  December,  and  March,  in  each  year  during 
the  continuance  of  said  partnership ;  and  all  loss  that  shall  happen  to  their 
said  business  by  ill  commodities,  bad  debts,  or  otherwise,  shall  be  borne  and 
paid  between  them  equally. 

IV'.  And  at  the  end  or  sooner  termination  of  their  partnership  the  said 
partners,  each  to  the  other,  shall  and  will  make  a  true,  just,  and  final  account 
of  all  things  relating  to  their  said  business,  and  in  all  things  truly  adjust 
the  same ;  and  all  the  stock,  as  well  as  the  gains  and  increase  thereof,  which 
shall  appear  to  be  remaining,  either  in  money,  goods,  wares,  fixtures,  debts, 
or  otherwise,  shall  be  divided  between  them. 

In  Witness  Whereof,  the  parties  hereto  have  hereunto  interchangeably 
set  their  hands,  the  day  and  year  first  above  written. 

In  the  presence  of  George  Rice. 

Warren  Jones.  Alfred  Post. 

State  of  New  York^ 

/■  ss 
County  of  Albany    J 

On  this  first  day  of  May,  one  thousand  nine  hundred  and  thirteen,  before 
me,  the  subscriber,  personally  appeared  George  Rice  and  Alfred  Post,  to  me 
personally  known  to  be  the  same  persons  described  in  and  who  executed 
the  foregoing  instrument,  and  they  severally  acknowledged  to  me  that  they 
executed  the  same.  Andrew  Johnson, 

Notary  Public  for  Albany  County,  New  York 


REVIEW  QUESTIONS  AND  PROBLEMS 

Section  139.  What  is  the  object  of  forming  a  partnership.'  What  are  its 
chief  characteristics.''  Distinguish  a  joint-stock  company  from  a  partnership. 
What  is  the  advantage  of  forming  a  corporation .'' 

140.  Define  partnership.  How  would  you  determine  whether  or  not  a 
particular  agreement  constitutes  a  partnership.''  What  is  an  ostensible  partner.'' 
a  dormant  partner.''    What  are  limited  partnerships.-'    Who  may  be  a  partner.'' 

Problem  i.  D  loaned  a  firm  (li  and  C)  ?2000  to  be  used  in  the  busi- 
ness, upon  an  agreement  that  he  was  to  have  one  third  of  the  profits. 
X  sold  goods  to  the  firm.  X  sues  I)  as  a  partner  along  with  B  and  C.  Is  D 
liable  to  X.? 

Problcfn  2.  In  the  above  case  D  is  to  receive  6  per  cent  interest  in  any 
case,  and  i  5  per  cent  of  the  profits  in  addition.    Is  D  liable  as  partner.-' 


246  I'ARINKRSIIII^S  [Ch.  XII 

l^ioblent  J.  J.  H.  has  carried  on  business  in  his  own  name,  and  X  has  dealt 
with  him.  Ho  sells  out  to  A  and  15,  wlio  eontinue  the  business  under  the  name 
J.  H.  &  Co.  They  order  goods  of  X  in  that  name  and  X  supplies  them.  X  docs 
not  know  that  J.  H.  has  gone  out  of  the  business.  J.  11.  knows  the  business  is 
carried  on  under  tiie  name  of  J.  H.  >S:  Co.    Is  J.  II.  liable  to  X? 

Prohlcin  4.  1)  is  a  dormant  partner  in  the  firm  of  B  and  C.  X  docs  not 
know  this.  He  sells  goods  to  13  and  C.  D  afterwards  withdraws.  X  then  sells 
more  goods  to  B  and  C.  (</)  Is  I)  liable  on  the  first  sale.''  {b)  Is  he  liable  on 
the  second  ? 

141.  State  the  duties  of  a  partner  toward  his  fellow  partners.  State  his 
rights.  Can  one  partner  claim  extra  compensation  ?  Can  one  partner  withdraw  } 
Can  one  sue  the  other  at  law  t 

Problem  j.  A,  B,  and  C  agree  to  enter  into  partnership,  and  A  is  intrusted 
with  the  purchase  of  a  horse.  He  buys  one  for  $200,  but  charges  it  to  the 
firm  at  $300.  In  an  action  for  an  accounting,  B  and  C  seek  to  recover  from 
A  $100  as  firm  money.    Result? 

Problem  6.  A  and  B  are  partners,  and  each  is  to  give  his  services  to  the 
firm  business.  A  becomes  ill,  and  all  the  work  devolves  upon  B.  May  B 
claim  compensation  for  this  extra  labor.'' 

Problem  7.  In  the  above  case  A  neglects  the  business  willfully  and  refuses 
to  perform  any  services.  B  is  compelled  to  manage  the  whole  business  alone. 
May  B  claim  extra  compensation  ? 

142.  What  are  a  partner's  powers?  Can  he  sell  real  property,  and  why? 
Can  he  make  negotiable  instruments?  Can  he  borrow  money?  Can  he 
exercise  any  powers  after  the  dissolution  of  the  firm? 

Problem  8.  A  and  B  are  partners  and  owe  C  $650.  A  gives  C  a  mort- 
gage in  the  firm  name  on  the  personal  property  of  the  firm  to  secure  this 
debt.    Is  this  binding  on   B  or  on  the  firm  A  and  B? 

Problem  g.  A  gave  the  above  mortgage  to  secure  his  individual  debt.  Does 
this  bind  B  ? 

Problem  10.  B  and  C  are  partners  in  the  conducting  of  a  theater.  B  bor- 
rows money  for  the  business  and  gives  a  promissory  note  in  the  firm  name. 
Is  C  bound  ? 

143.  State  the  liabilities  of  a  partner.  How  is  an  action  brought  on  a 
debt  against  a  firm?  How  is  a  judgment  satisfied?  What  is  contribution?  Is 
an  incoming  partner  liable  for  debts  contracted  before  he  became  a  member 
of  a  firm?    How  may  an  action  for  tort  be  brought  against  a  firm? 

144.  State  the  rule  as  to  the  relative  rights  of  creditors  of  the  partnership 
and  creditors  of  a  partner. 

Problem  11.  A,  B,  and  C  are  equal  partners.  The  partnership  property  is 
worth  510.000.  A  has  S5000  individually,  B  54000,  and  C  no  assets.  The 
partnership  debts  amount  to  512,000.    A's  debts  amount  to  $3000,  B's  to 


REVIEW  QUESTIONS  AND  PROBLEMS  247 

$6000,  and  C's  to  >2ooo.    Adjust  these  sums  among  the  firm  and  individual 
creditors. 

Problef/i  12.   Same  problem  if  firm  debts  were  only  $8000. 

145.  How  is  a  partnership  dissolved?  What  should  be  done  after  disso- 
ludon  ?  What  interest  have  the  representatives  of  a  deceased  partner  in  a 
partnership  of  which  the  deceased  was  a  member?  What  is  done  with  a  surplus 
after  firm  debts  are  paid  ? 

146.  How  do  joint-stock  companies  differ  from  partnerships? 

147.  How  do  they  resemble  partnerships? 


chapi'i:r  XIII 

CORPORATIONS 

148.  Definition  and  classification.  A  corporation  is  an  artificial 
entity  created  by  statute  law  and  endowed  with  many  of  the  legal 
capacities  of  individuals,  as  the  power  to  take,  hold,  and  convey 
property,  make  contracts,  sue  and  be  sued,  and  the  like. 

It  is  a  legal  entity  distinct  from  its  members,  individually  or 
collectively.  It  may,  for  example,  sue  a  member  or  be  sued  by 
a  member.  It  may  sue  any  person  without  joining  its  members, 
and  may  be  sued  by  any  person  without  joining  its  members. 
The  title  to  property  vests  in  it  and  not  in  its  members.  Were 
all  the  members  to  unite  in  one  deed,  they  could  not  convey  the 
property  of  the  corporation.  It  is,  within  its  charter  powers, 
regarded  for  all  purposes  as  an  artificial  person  —  a  distinct 
member  of   the  business   community. 

Public  corporations  are  political  entities  created  for  govern- 
mental purposes,  as  counties,  cities,  and  the  like. 

Private  corporations  are  created  for  the  promotion  of  some 
interest  in  which  their  members  are  concerned.  These  fall  into 
two  main  classes :  stock  corporations,  which  are  for  private 
pecuniary  gain,  and  membership,  or  nonstock,  corporations, 
which  are  for  a  variety  of  purposes,  as  clubs,  charitable  societies, 
educational  institutions,  and  the  like. 

Stock,  or  business,  corporations  are  those  with  which  we  are 
concerned.  They  are  intended  to  enable  a  number  of  persons 
to  unite  their  capital  in  one  enterprise,  with  two  important 
results  :  first,  the  power  to  transfer  their  shares  to  other  holders 
without  affecting  the  business  ;  and,  second,  an  exemption  from 
any  personal  liability  for  the  debts,  contracts,  or  torts  of  the 
corporation.  A  partnership  accomplishes  neither  of  these  results. 
A  joint-stock  company  accomplishes  the  first  but  not  the  second. 

149.  How  a  corporation  is  formed.  A  corporation  is  created  by 
legislative  grant.     Some  are  created   by  a  special  statute  which 

248 


§149]  HOW  FORMED  249 

names  the  corporation  and  defines  its  powers,  but  state  con- 
stitutions very  generally  prohibit  the  legislatures  from  chartering 
private  business  corporations  by  special  act.  Business  corpora- 
tions are  now  usually  created  under  a  general  statute  which  per- 
mits a  number  of  persons  to  form  a  corporation  by  executing  and 
filing  with  some  designated  public  oflficial  articles  of  association  or 
incorporation.  The  certificate  contains  the  name  of  the  corpora- 
tion, its  object,  the  amount  of  capital  stock,  the  number  of  shares 
into  which  the  capital  stock  is  divided,  the  place  where  its  prin- 
cipal business  office  is  to  be  located,  the  duration  of  the  corpora- 
tion, the  number  of  its  directors,  with  the  names  and  addresses  of 
those  who  are  to  serve  at  the  outset,  and  in  some  states  the  names 
and  addresses  of  the  subscribers  to  the  stock,  with  the  amount  sub- 
scribed. Often  the  statute  requires  that  a  specified  number  of  the 
incorporators  shall  be  citizens  of  the  United  States,  and  a  specified 
number  citizens  of  the  state  under  whose  statute  the  certificate  is 
filed.  Some  statutes  require  that  the  name  of  an  officer  or  agent 
upon  whom  legal  process  may  be  served  shall  also  be  specified. 

The  statute  under  which  a  certificate  is  made  and  the  certifi- 
cate itself  together  constitute  the  charter  of  the  corporation  and 
define  and  limit  its  powers. 

ExAiMPLE  OF  New  York  Certificate 

Wc,  the  undersigned,  all  being  persons  of  full  age,  and  at  least  two  thirds 
citizens  of  the  United  States,  and  at  least  one  of  us  a  resident  of  the  state 
of  New  York,  desiring  to  form  a  stock  corporation,  pursuant  to  the  provisions 
of  the  Business  Corporation  Law  of  the  state  of  New  York,  do  hereby  make, 
sign,  acknowledge,  and  file  this  certificate  for  that  purpose,  as  follows : 

JursL  The  name  of  the  proposed  corporation  is  Tlie  Cayuga  Manufac- 
iurittg  Company. 

Second.  The  purposes  for  which  it  is  to  be  formed  arc  to  manufacture, 
sell  and  trade  in  agricultural  implements  and  machinery. 

Third.    The  amount  of  capital  stock  is  one  hundred  thousand  dollars. 

Fourth.  The  number  of  shares  of  which  the  capital  stock  shall  consist  is 
one  thousand,  and  the  amount  of  capital  with  which  said  corponition  will 
begin  business  is  twenty  thousand  dollars. 

Fifth.  The  principal  business  office  is  to  be  located  in  the  city  of  llluica, 
in  the  county  of  Tompkins,  state  of  New  York. 

Si.vth.    Its  duration  shall  be  fifty  years. 

Seventh.     The  number  of  its  directors  is  to  be  five. 


250  CORrC)RA'I"R)NS  [Cu.  XIII 

Eighth.  The  names  and  post-office  addresses  of  the  directors  for  the  first 
year  are  as  follows  : 

[Here  insert  five  names  and  addresses.] 

Ninth.  The  names  and  post-office  addresses  of  the  subscribers,  and  a 
statement  of  the  number  of  shares  of  stock  which  eacii  member  agrees  to 
take  in  the  corporation,  are  as  follows : 

[Here  insert  names,  addresses,  and  amounts  subscribed.] 

In  WiTNKSs  Whereof,  we  have  signed,  acknowledged,  and  filed  this 
certificate  in  duplicate. 

Dated  this  loth  day  of  January,  iqi6. 

John  Doe 

Richard  Roe 

Henry  Fenn 

John  S.  Dale 

.  . ^       ,r    1      ^  Wm.  Blackheath 

State  of  New  York     1 

i-SS. 

County  of  Tompkins  J 

On  the  loth  day  of  January,  191 6,  before  me  personally  appeared  John 
Doe,  Richard  Roe,  Henry  Fenn,  John  S.  Dale,  and  VVm.  Blackheath,  to  me 
personally  known  to  be  the  persons  described  in  and  who  made  and  signed 
the  foregoing  certificate,  and  severally  duly  acknowledged  to  me  that  they 
had  made,  signed,  and  executed  the  same  for  the  purposes  therein  set  forth. 

George  Redbank,  Notary  Public. 

[This  is  filed  and  recorded  in  the  office  of  the  Secretary  of  State,  and  a  certified  copy  or 
duplicate  original  is  filed  and  recorded  in  the  office  of  the  clerk  of  Tompkins  County.  Fees 
are  required  for  filing  and  recording.  An  organization  tax  must  also  be  paid  to  the  State 
Treasurer.] 

150.  Members.  The  members  of  a  business  corporation  are 
those  who  hold  its  stocks ;  they  are  called  stockholders  or  share- 
holders. The  relation  of  stockholders  to  a  corporation  and  to 
each  other  is  contractual.  At  the  outset  individuals  subscribe 
for  shares  of  stock,  that  is,  contract  to  take  them  when  issued, 
and  thereby  agree  to  associate  themselves  as  stockholders  accord- 
ing to  the  provisions  of  the  charter  and  the  terms  of  the  sub- 
scription. They  also  agree  to  pay  for  the  stock  when  issued  or 
when  payment  may  be  called  for.  When  a  stockholder  has  fully 
paid  for  his  stock,  he  is  under  no  further  liability  unless  the  stock 
is  by  statute  or  contract  made  subject  to  assessments. 

When  a  stock  certificate  has  been  issued,  the  owner  may  trans- 
fer it  and  the  transferee  becomes  a  stockholder.    The  so-called 


§150]  MEMBERS  251 

Uniform  Stock  Transfer  Act,  now  in  force  in  fourteen  jurisdictions,^ 
governs  the  method  of  stock  transfer  and  the  rights  of  transferor 
and  transferee.    According  to  this  act  the  transfer  is  completed 

Form  of  Stock  Certificate 


^.   „  No.  of  shares,  10 

Ao.  33 

Par  value  of  each,  SiOO 

The  Cayuga  Manufacturing  Company 

(TTjlEf  16  to  CCrtifp  that  John  Doe  is  the  owner  of  ten  shares  of  the 
capital  stock  of  the  Cayuga  Manufacturing  Company,  transferable  only 
on  the  books  of  the  company  by  the  holder  thereof,  in  person  or  by  attorney, 
upon  the  surrender  of  this  certificate  properly  indorsed. 

^Xl  i^ttnCfid  ^l)CXCat,  the  said  Company  has  caused  its  corporate  seal 
to  be  affixed  hereto  and  this  certificate  to  be  signed  by  its  presi- 
dent and  treasurer. 


Corporate 
Seal 


Ithaca,  New  York,  Jan.   24.    1916 

Henry   Fenn,  President 
Wm.   Blackheath,  Treasurer 


Form  of  Transfer  on  Back  of  Stock  Certificate 


For  value  received,  I  hereby  sell,  assijn,  and  transfer,  unto 

,  shares  of  the  within- 
mentioned  stock,  and  do  hereby  constitute  and  appoint 

my  true  and  lawful  attorney 

to  transfer  the  same  on  the  books  of  the  company.  • 

Witness  my  hand  and  seal,  this day  of , 

19 

Witness: 

(Seal) 


by  indonscment  of  the  certificate  in  blank  or  to  a  spcciiicd  person 
or  by  the  execution  and  dchvcry  of  a  separate  instrument  assign- 
ing the  certificate  or  giving  a  power  t(j  assign  it,  couj)lcd  with  a 

'  Alaska,  Connecticut,  Illinois,  Louisiana.  Maryland,  Massachusetts,  Michigan, 
NcwJcrscy,Ncw\'ork,Ohio,  Pennsylvania,  Rhode  Island, Tennessee,  and  Wyoming. 


252  CORPORATIONS  [Cii.  XIII 

delivery  of  the  certificate.  The  re^^istration  of  the  new  holder's 
name  on  the  books  of  the  corporation  is  not  necessary  to  the 
complete  transfer  of  the  stock  under  this  act.  It  is  usual  to  in- 
dorse on  the  certificate  of  stock  a  power  of  attorney  to  the  new 
holder  to  make  the  transfer.  When  a  certificate  is  so  indorsed 
with  the  name  of  the  transferee  left  blank,  the  certificate  may 
pass  from  hand  to  hand  until  some  holder  chooses  to  insert  his 
name  and  have  the  transfer  made  to  him  upon  the  books.  Stock 
certificates  do  not  generally  have  the  characteristics  of  negoti- 
able paper,  but  under  the  Uniform  Stock  Transfer  Act  they 
have  been  given  a  limited  negotiability.  Infants  and  others  not 
competent  to  contract  may  become  transferees  and  holders  of 
stock  in  3.  corporation. 

A  stock  certificate  is  the  written  evidence  issued  by  the  cor- 
poration that  the  person  named  in  it  is  registered  on  the  books 
of  the  company  as  the  owner  of  a  specified  number  of  its  shares 
of  capital  stock,  each  of  a  certain  par  value. 

151.  Directors.  In  a  corporation  the  members  (stockholders) 
are  not,  as  such,  agents  of  the  corporation.  They  have  the  power, 
however,  to  elect  the  directors,  who  are  the  ultimate  managers 
of  the  business  and  who  appoint  the  necessary  active  agents 
and  officers. 

Directors  are  elected  by  a  majority  vote  of  the  stockholders, 
each  stockholder  usually  having  one  vote  for  each  share  of  stock 
he  owns.  It  follows  that  if  one  person,  or  a  group  of  persons 
acting  together,  owns  a  majority  of  the  stock,  he,  or  they,  can 
elect  all  the  directors.  To  avoid  this,  some  statutes  provide  for 
cumulative  voting.  For  example,  if  three  directors  are  to  be 
elected,  a  stockholder  with  ten  shares  may  cast  ten  votes  for  each 
of  three  or  may  concentrate  thirty  votes  upon  one.  If  there  are 
looo  shares  of  stock,  and  the  majority  acting  together  own  740, 
and  the  minority  260,  the  latter,  by  casting  triple  votes  for  one 
candidate,  would  give  him  780  votes,  or  more  than  the  majority 
casting  single  votes  for  each  of  three  could  muster.  Thus  the 
minority  would  elect  one  director  and  the  majority  two.  The 
registered  stockholder  is  usually  the  only  one  entitled  to  vote.  It 
is  commonly  provided  that  a  stockholder  may  vote  by  proxy,  that 
is,  authorize  another  to  vote  for  him. 


§152]  OFFICERS  AND  AGENTS  253 

The  powers  of  the  directors  are  very  extensive  and  are  fixed  by 
the  charter  of  the  corporation.  The  directors  are,  when  convened 
as  a  board,  the  embodiment  of  all  corporate  powers  except  those 
which  must  be  exercised  by  the  stockholders.  They  could  not 
change  the  nature  or  the  purposes  of  the  corporation,  increase 
or  decrease  its  capital  stock,  dissolve  it,  or  consolidate  it  with 
another  corporation  ;  these  powers  are  vested  in  the  stockholders  ; 
but  in  the  management  of  the  corporation  within  the  limits  of 
the  charter  powers  the  directors  are  supreme. 

Directors  are  bound  to  exercise  reasonable  care  in  the  conduct 
of  the  corporate  business,  and  ihay  become  liable  to  the  corpora- 
tion for  losses  resulting  from  their  negligence.  Directors  also 
stand  in  a  fiduciary  relation  to  the  stockholders,  and  cannot  secure 
to  themselves  any  advantage  at  the  expense  of  stockholders. 

Statutes  often  require  directors  to  file  annual  reports  with 
some  public  officer,  and  fix  a  penalty  for  failure  to  do  so  or  for 
the  filing  of  a  false  report. 

152.  Officers  and  agents.  The  officers  of  a  corporation  are 
appointed  by  the  directors  in  conformity  with  the  by-laws.  Agents, 
other  than  officers,  are  sometimes  appointed  by  the  directors  and 
sometimes  by  an  officer.  The  general  law  of  agency  governs  the 
ostensible  powers  of  such  officers  and  agents,  except  that  third 
persons  are  supposed  to  know  the  provisions  of  the  charter  as  to 
the  powers  of  the  corporation  itself,  and  perhaps  the  provisions 
of  the  by-laws  as  to  the  powers  of  the  officers.  Officers  and  agents 
are  entitled  to  compensation,  but  directors  are  not  unless  it  is 
especially  voted  by  the  shareholders. 

The  powers  of  the  officers  are  usually  fixed  by  the  by-laws  of 
the  corporation.  When  the  by-laws  do  not  fix  the  powers,  they 
may  be  prescribed  by  the  directors. 

The  president  is  always  a  member  of  the  board  of  directors, 
and  usually  presides  as  its  chairman.  He  is  ordinarily  empowered 
to  execute  contracts,  deeds,  and  other  documents,  cither  by  gen- 
eral or  by  special  vote  of  the  directors,  and  is  the  chiif  dlTiccr, 
in  whom  is  vested  the  largest  measure  of  authority. 

The  vice  president  acts  when  the  president  is  absent,  or,  in 
large  corporations,  he  has  some  special  department  of  the  busi- 
ness  confided    to   him.     Tn    large  corporations    there   are   often 


254  CORI'ORATIONS  [Cii.  XIII 

several  vice  presidents,  kntmn  as  first  vice  president,  second 
vice  president,  etc. 

The  secretary  keeps  tiie  records  oi'  the  meetings  of  tlic  directors 
and  stockholders.  He  is  also  usually  the  custodian  of  the  seal 
of  the  corporation  and  attaches  it  to  documents  requiring  a  seal ; 
he  may  also  attest  the  signature  of  the  president  to  contracts, 
deeds,  etc.,  although  this  is  more  commonly  done  by  the  treasurer. 
He  has  charge  of  the  transfer  of  the  stock  certificates  on  the 
books  of  the  corporation,  and  may  be  designated  as  an  assistant 
to  the  treasurer. 

The  treasurer  is  the  fiscal  agent  of  the  corporation.  He  has 
charge  of  its  funds,  its  bank  account,  its  securities  and  general 
assets.  The  books  are  kept  under  his  supervision.  He  usually 
countersigns  the  obligations  issued  by  the  corporation  in  the  form 
of  contracts,  checks,  notes,  etc.,  indorses  for  deposit  or  collection 
the  checks  payable  to  it,  and  in  general  handles  its  money  and 
negotiable  paper. 

The  general  manager  is  the  chief  assistant  of  the  president, 
and  the  officer  with  whom  persons  having  business  with  the 
corporation  generally  deal.  He  usually  appoints  the  subordinate 
agents  and  servants,  makes  contracts  for  ordinary  supplies  and  the 
sale  of  products,  and  conducts  the  routine  business  affairs  of  the  con- 
cern. In  the  case  of  unusual  contracts  it  is  always  best  to  ascertain 
from  the  president  whether  the  general  manager  has  authority. 

As  there  are  some  contracts  which  even  the  president  cannot 
make  without  special  authority  of  the  directors,  such  as  the  issuing 
of  bonds  and  notes  for  borrowing  money,  the  sale  of  corporate 
assets  and  franchises,  and  the  like,  it  is  necessary  in  cases  of 
doubt  to  make  sure  that  the  act  is  duly  authorized.  It  is  not 
uncommon  for  a  corporation  to  repudiate  a  contract  upon  the 
ground  that  the  officer  making  it  exceeded  his  authority. 

153.  Powers  of  a  corporation.  A  corporation  as  such  may  be 
sai€  to  possess  at  the  least  these  necessary  powers  and  qualities : 

1 .  To  have  a  corporate  name,  as  an  individual  has  a  name ; 
but,  once  adopted,  the  name  of  a  corporation  can  be  changed 
only  as  prescribed  by  law. 

2.  To  have  a  corporate  seal. 

3.  To  sue  and  be  sued  in  its  corporate  name. 


§154]  POWERS  255 

4.  To  appoint  such  officers  and  agents  as  its  business  may  require. 

5.  To  make  b}--laws  for  the  management  of  its  business,  the 
transfer  of  its  stock,  the  calhng  of  meetings,  etc. 

6.  To  acquire  and  dispose  of  such  property  (in  its  corporate  name 
or  under  its  corporate  seal)  as  may  be  necessary  to  its  corporate 
existence  or  purposes.  The  amount  of  real  estate  it  may  hold  is 
often  limited  by  law.  In  the  absence  of  such  express  restriction, 
it  may  hold  onl}'  what  is  reasonably  necessary.  It  could  not, 
unless  expressly  authorized,  engage  in  real-estate  speculations. 

7.  To  make  such  contracts  as  are  reasonably  necessary  to  carry 
out  the  purposes  for  which  it  is  organized.  This  includes  the 
power  to  borrow  money,  give  security,  and  issue  negotiable  paper, 
as  well  as  to  make  the  ordinary  contracts  of  sale,  agency,  etc. 
But  a  corporation  cannot,  unless  expressly  authorized,  enter  into 
a  partnership  with  other  corporations  or  with  individuals  ;  nor  can 
it  enter  into  a  so-called  trust  in  order  to  create  a  monopoly  or 
eliminate  competition. 

8.  In  general,  a  corporation  may  engage  in  such  business  as 
its  charter  contemplates,  and  in  no  other.  A  partnership  may 
engage  in  almost  any  lawful  business,  but  a  corporation  has  no 
powers  except  those  expressly  conferred  or  those  reasonably  inci- 

'dent  to  those  expressly  conferred.  A  corporation  authorized  to 
manufacture  and  sell  machinery  cannot  engage  in  the  banking 
business  or  the  transportation  business.  Such  acts  in  excess  of 
powers  granted  arc  said  to  be  itltra  vires.  It  has  been  held  that 
a  railroad  company  could  not  run  a  steamboat  beyond  its  terminus, 
though  it  might  run  one  as  a  ferry  to  connect  its  lines.  So  a 
steamboat  company  could  not  run  a  railroad,  though  it  might  run 
a  short  line  as  a  '"  carry  "  between  two  navigable  points.  Certain 
powers  are  regarded  as  incidental  to  the  express  powers,  but  these 
do  not  extend  beyond  the  necessities  of  the  corporate  business, 
and  are  not  to  be  so  broadly  construed  as  to  lead  the  corporation 
into  unaut!ir)rizcd  enterprises. 

154.  Stockholders'  rights.  l'>ach  stockholder  has  these  rights 
as  against  the  corporation  : 

I.  To  have  issued  to  him  a  certificate  of  stock  representing  his 
interest  and,  if  he  is  a  transferee,  to  have  the  transfer  entered 
on  the  books  of  the  company. 


256  CORPORATIONS  [Cii.  XIII 

2,  To  vote  at  stockholders'  mcctinj^s.  By  the  generally  pre- 
vailing rule  each  stock  holder  has  as  many  votes  as  he  has  shares 
of  stock.  He  may  exercise  his  right  personally  or  by  proxy.  The 
stockholder  of  record  (that  is,  the  one  whose  name  appears  on 
the  books  of  the  corporation)  is  entitled  to  vote  even  though  he 
has  transferred  the  stock. 

3.  To  inspect  the  books  of  the  company  when  a  demand  to 
do  so  is  made  in  good  faith  and  for  a  proper  purpose. 

4.  To  participate  in  dividends  when  the  same  have  been 
declared.  The  profits  of  the  corporate  enterprise  are  from  time 
to  time  divided  among  the  stockholders  in  the  form  of  dividends, 
each  stockholder  getting  a  per  cent  upon  the  face  value  of  his 
stock.  If  dividends  are  about  equal  to  the  interest  upon  normal 
safe  investments,  the  stock  remains  at  or  near  par  ;  that  is,  a  ^100 
share  of  stock  sells  for  ^100.  If  the  dividends  are  large,  the 
stock  goes  above  par ;  if  small  or  uncertain,  the  stock  goes  below 
par.  If  no  dividends  are  paid,  the  stock  may  become  valueless 
except  for  voting  purposes  and  to  enable  holders  to  control  the 
corporation. 

Profits  are  what  remains  after  deducting  running  expenses, 
improvements,  accrued  debts,   interest  on  bonds,  a  fair  reserve 
for  depreciation    in   buildings,    machinery,    or  other   equipment,  * 
and,  perhaps,  a  sinking  fund  for  the  payment  of  the  bonds. 

Directors  have  a  large  discretion  in  the  matter  of  declaring 
dividends,  and  may  add  profits  to  capital  instead  of  distributing 
them,  so  long  as  they  act  in  good  faith. 

Preferred  stock  is  that  upon  which  it  is  agreed  to  pay  a  fixed 
rate,  practically  an  interest  rate,  before  any,  dividends  shall  be 
declared  upon  the  common  (nonpreferred)  stock. 

Bonds  are  promises  to  pay  a  principal  sum  with  interest,  and 
are  usually  secured  by  mortgage  upon  the  corporate  property. 
Bondholders  are  simply  creditors.  A  coupon  bond  is  one  to 
which  separate  interest  coupons  are  attached  for  each  annual 
or  semiannual  interest  payment  (see  p.  169  ante). 

5,  A  stockholder,  in  behalf  of  himself  and  other  stockholders, 
may  invoke  the  aid  of  a  court  to  restrain  the  officers  from  com- 
mitting a  breach  of  trust,  or  the  corporation  itself  from  engaging 
in  ultra  vires  acts,  that  is,  acts  beyond  the  scope  of  the  charter 


§§155,156]  STOCKHOLDERS'  LIABILITIES  257 

powers.  While  the  majority  rule,  they  must  rule  within  the  limits 
of  the  charter  powers  ;  and  if  they  exceed  these,  or  if  their  acts 
are  fraudulent,  the  minority  may  obtain  an  injunction. 

155.  Liability  of  stockholders.  Stockholders  are  liable  to  the 
corporation  for  any  unpaid  portion  of  their  subscriptions.  This 
liability  is  enforced  by  an  action  at  law,  like  any  action  to  collect 
a  debt. 

Stockholders  are  not  liable  to  creditors  of  the  corporation 
unless  the  statute  or  charter  provides  for  some  personal  liability ; 
but  creditors  may  compel  original  stockholders,  if  they  have  paid 
to  the  corporation  less  than  par  value  for  the  stock  issued  to 
them,  to  pay  the  balance  if  the  creditors  have  been  led  to  believe 
that  stockholders  were  paying  in  to  the  capital  stock  the  full  par 
value.  It  is  a  kind  of  fraud  on  creditors  for  a  corporation  to 
advertise  a  capital  stock  of  say  $100,000  fully  paid  in,  when  in 
fact  it  issued  the  stock  at  forty  cents  on  the  dollar  and  the  capi- 
tal stock  is  therefore  only  $40,000.  So  also  most  courts  hold 
that  if  the  capital  stock  is  fully  paid  in,  but  a  part  of  it  is  there- 
after returned  to  stockholders  under  the  guise  of  dividends, 
the  creditors  may  compel  the  stockholders  to  refund  it  so  far 
as  necessary  to  pay  the  debts  of  the  corporation. 

If  the  statute  makes  stockholders  personally  liable  for  the  debts 
of  the  corporation,  or  liable  to  an  amount  specified  (for  example, 
to  an  amount  equal  to  the  face  value  of  their  shares  of  stock), 
a  creditor  who  has  a  judgment  against  the  corporation  which  he 
cannot  satisfy  out  of  its  property  may  proceed  against  stock- 
holders who  were  such  when  his  debt  was  contracted  or,  as  in 
some  jurisdictions,   when   his  action  was  begun. 

156.  Reports  of  corporations.  The  statutes  generally  provide 
that  a  stock  corporation  shall  make  an  annual  report  of  its  affairs 
and  file  the  same  in  some  public  office  where  any  person  may 
inspect  it.  This  is  in  order  that  persons  who  may  wish  to  do 
business  with  the  corporation  may  ascertain  whether  it  is  in  a 
sound  and  solvent  condition.  The  report  usually  contains  a  state- 
ment as  to  the  amount  of  capital  stock,  the  amount  actually 
issued,  the  amount  of  the  debts,  and  the  amount  of  the  assets. 
The  statutes  quite  generallv  make  directors  personally  liable  for 
debts  in  case  they  fail  to  file  such  a  report,  and  also  for  debts 


258  CORPORATIONS  [Ciixiir 

contracted  upon  the  faith  of  the  report  filed  in  case  it  is  false  in 
any  material  i)artieular,  and  sometimes  for  damages  suffered  by 
persons  purehasing  stock  upon  the  faith  of  such  false  report. 

157.  Receivers  of  corporations.  When  a  corporation  becomes 
insolvent,  the  court  may,  upon  the  petition  of  the  directors,  bond- 
holders, or  general  creditors,  appoint  a  receiver  of  the  property 
and  assets  of  the  corporation.  A  receiver  may  also  be  appointed 
upon  the  petition  of  a  stockholder,  if  the  directors  arc  wasting  or 
misapplying  the  funds  or  property.  A  receiver  is  an  officer  of 
the  court  and,  as  such,  takes  entire  charge  of  all  the  property  and 
business  pending  a  dissolution  or  reorganization  of  the  corporation. 
The  property  until  final  decree  is  therefore  in  the  custody  of  the 
court  appointing  the  receiver. 

A  receiver's  certificate  is  an  obligation  issued  by  a  receiver 
under  authority  of  the  court  for  the  purpose  of  raising  money  to 
carry  on  the  business  of  the  corporation  during  the  term  of  the 
receivership.  It  takes  precedence  over  all  other  obligations  of 
the  corporation,   even  its  first-mortgage  bonds. 

158.  Dissolution  of  corporations.  A  corporation  is  dissolved 
by  the  expiration  of  the  time  for  which  it  was  chartered. 

A  corporation  may  be  dissolved  by  the  decree  of  a  court  for 
various  causes,  among  which  may  be  mentioned  insolvency,  non- 
use  of  franchises,  abuse  of  charter  powers,  violation  of  law,  and 
other  fraudulent  or  illegal  acts.  The  directors  or  stockholders  may 
also  apply  for  permission  to  surrender  the  charter  whenever  they 
deem  such  a  course  beneficial  to  the  interests  of  the  stockholders. 

Upon  dissolution,  after  all  debts  and  claims  are  paid,  the  re- 
maining assets  are  divided  among  the  stockholders  in  proportion 
to  their  holdings. 

REVIEW  QUESTIONS 

Section  148.  Define  a  corporation.  What  is  meant  by  saying  it  is 
a  legal  entity?  What  are  public  corporations?  What  are  private  corpora- 
tions? What  two  mam  classes  of  private  corporations?  Object  of  a  stock 
corporation  ? 

149.  How  is  a  corporation  created?  Explain  what  constitutes  the 
charter  where  a  corporation  is  formed  under  a  general  act.  Draw  articles 
of  association  to  incorporate  a  stock  company  to  quarry  and  sell  stone. 


REVIEW  QUESTIONS  259 

150.  Who  are  members  of  a  stock  corporation?  How  does  membership 
change?    What  is  a  stock  certificate?    How  is  it  transferred? 

151.  Who  are  the  directors?  How  are  they  chosen?  What  is  cumulative 
voting,  and  what  is  its  object  ?  What  are  the  powers  of  the  directors  ?  What 
is  their  duty  ? 

152.  How  are  corporate  officers  and  agents  appointed?  Which  officers 
are  entitled  to  compensation  ?  How  are  the  powers  of  officers  fixed  ?  Define 
the  powers  of  each.  In  a  corporation  what  is  the  ultimate  authority  as  to 
contracts  ? 

153.  Enumerate  the  powers  of  a  corporation.  How  much  real  estate  may 
it  hold?  May  it  become  a  partner?  What  business  may  it  conduct?  What 
are  ultra  vires  acts? 

154.  What  are  the  rights  of  stockholders?  How  many  votes  does  each 
stockholder  have?  What  are  dividends?  How  fixed?  What  are  profits? 
What  is  preferred  stock?  What  are  bonds?  When  may  a  stockholder  seek 
the  aid  of  a  court  to  protect  his  interests? 

155.  When  is  a  stockholder  liable  to  the  corporation?  When  is  he  liable 
to  creditors  of  the  corporation  in  the  absence  of  statutory  liability  ?  What  is 
statutory  liability  ? 

156.  What  reports  of  corporations  are  required?  What  do  they  contain? 
Where  are  they  filed  ?    What  is  the  effect  if  they  are  not  filed  or  are  false  ? 

157.  Who  is  a  receiver?  Whose  agent  is  he ?  What  are  receiver's  certifi- 
cates?   Are  they  more  or  less  valuable  than  bonds? 

158.  How  may  a  corporation  be  dissolved?  After  dissolution,  what  is 
done  with  the  assets? 


PART  VI.    PROPERTY  IN  LAND  AND 
MOVABLES 

CHAPTER  XIV 

REAL  PROPERTY 

I.    Estates  in  Real  Property 

159.  Meaning  of  the  term  "  property."  Property  may  be  re- 
garded as  an  object  or  as  a  right  or  estate  in  or  to  an  object. 
It  may  be  corporeal  or  incorporeal,  and  it  is  classified  as  real 
and  personal. 

1.  Property  as  aji  object.  The  word  "property"  is  used  con- 
cretely to  designate  an  object  or  thing  (lands  or  chattels)  in  which 
one  may  have  a  proprietary  right ;  it  is  used  abstractly  to  designate 
the  right,  interest,  or  estate  one  has  in  such  an  object  or  thing. 
Property  in  the  legal  sense  is  the  right,  often  but  not  always 
exclusive,  to  possess,  enjoy,  and  dispose  of  lands  and  chattels. 

As  an  object  of  ownership,  property  falls  into  two  classes : 
{a)  immovables,  or  land  and  things  so  annexed  thereto  or  con- 
nected therewith  as  to  be  regarded  as  a  part  of  the  land  ;  {b)  mov- 
ables, or  things  not  so  annexed  to  land  as  to  be  considered  a 
part  thereof.  The  first  class  is  popularly  called  real  property, 
and  the  second  personal  property  ;  but  in  the  view  of  the  law 
not  all  interests  in  land  are  real-property  interests.  It  becomes 
necessary,  therefore,  to  classify  the  interests  which  one  may  have 
in  land  into  real  estate,  or  real  property,  and  personal  estate,  or 
personal  property. 

2.  Property  as  an  estate.  Real  estate,  or  real  property,  consists 
of  the  estate  in  land,  known  as  a  freehold  estate  because  it  was 
that  by  which  the  freemen  held  lands  under  the  old  feudal  sys- 
tem. This  estate  is  either  an  estate  of  inheritance,  which  descends 
to  one's  heirs,  or  a  life  estate,  which  terminates  with  the  life  of 

261 


262  REAL  PROPERTY  [Cn.  XIV 

the  possessor  of  it  or  the  life  of  some  other  designated  person. 
All  other  estates  in  land  are  personal  property  and  are  known  as 
estates  less  than  a  freehold  ;  they  consist  of  estates  for  a  deter- 
minate time,  as  a  leasehold  estate  for  a  definite  period  of  years. 
Mortgages  and  liens  on  land  are  also  personal  estate. 

Real  property,  then,  includes  all  estates  in  land  except  lease- 
holds and  liens. 

Personal  property  includes  leasehold  estates  in  land,  liens  upon 
land,  and  all  interests  in  movables. 

The  terms  "  real  property  "  and  "  personal  property  "  arc  derived  not  from 
the  nature  of  the  object  owned  but  from  the  forms  of  action  used  by  one  who 
had  been  deprived  of  possession.  If  one  could  recover  the  thing  itself,  he 
used  a  "  real  action  " ;  if  he  could  recover  only  the  money  value  of  the  thing, 
he  used  a  "  personal  action."  Hence  it  came  to  be  said  that  a  thing  which 
could  be  recovered  specifically  vi^as  a  "  thing  real,"  or  "  real  property,"  while  a 
thing  which  could  not  be  so  recovered,  but  only  damages  for  its  withholding, 
was  a  "  thing  personal,"  or  "  personal  property."  This  serves  to  explain  why 
all  interests  in  land  are  not  real  property.  These  forms  of  action  have  disap- 
peared, but  the  names  remain  to  puzzle  the  student. 

3.  Corporeal  and  incorporeal  property.  Property  may  be  corpo- 
real or  incorporeal.  Corporeal  property  is  tangible  and  material ; 
incorporeal  property  is  intangible  and  ideal. 

Corporeal  real  property  consists  of  land  and  its  fixtures  ;  incor- 
poreal real  property  consists  of  certain  permanent  rights  of  enjoy- 
ment or  profit  in  another's  land,  as  a  right  of  way  over  it. 

Corporeal  personal  property  consists  of  physical  movable  arti- 
cles ;  incorporeal  personal  property  consists  of  rights  granted  by 
government,  as  a  patent  right  or  copyright,  and  of  rights  of  action 
against  another  (known  as  choses  in  action),  as  a  right  to  a  debt 
or  to  damages  for  a  breach  of  contract,  etc.  Stock,  bonds,  nego- 
tiable instruments,  and  the  like  are  incorporeal  personal  property. 

4.  Lands,  tenements,  and  hereditaments.  Real  property  is 
often  described  as  "  lands,  tenements,  and  hereditaments."  These 
terms  call  for  definition. 

a.  Land  comprehends  the  soil  and  those  things  annexed  to  it  either  by 
nature  or  by  man,  such  as  waters,  trees,  ores,  houses,  fences,  etc.  The  land, 
in  contemplation  of  law,  extends  downward  to  the  center  of  the  earth  and  up- 
ward to  the  highest  heavens.  Thus,  one  owning  ten  acres  of  land  would  have 
his  possession  defined  by  a  pyramid  with  its  apex  at  the  center  of  the  earth 


§159]  KINDS  OF  PROPERTY  ,  263 

and  with  its  sides  passing  through  his  boundaries  indefinitely  into  space. 
Anyone  breaking  into  this  pyramid,  or  "  close,"  at  any  point  is  said  to  be 
a  trespasser. 

b.  The  term  "  tenements  "  is  broader  than  the  term  "  land,"  and  includes  not 
only  lands  but  also  whatever  else  could  be  held  under  feudal  tenure,  such  as 
easements  in  lands.  If  B  owns  tract  X  and  C  owns  tract  Y,  C  may  acquire  for 
the  benefit  of  tract  Y  a  right  of  way  over  tract  X.  C  therefore  owns  lands 
(tract  Y)  and  tenements  (right  of  way  over  tract  X).  The  modern  use  of  the 
term  "  tenement  "  to  describe  a  building  rented  to  tenants  is  to  be  distinguished 
from  this  technical  meaning. 

c.  The  word  "  hereditaments  "  is  the  broadest  of  all,  and  includes  whatever 
may  be  inherited  by  an  heir  from  an  ancestor.  It  includes  not  only  lands  and 
tenements  but  also  heirlooms,  such  as  an  historic  powderhorn,  family  jewels, 
etc.  Heirlooms,  while  common  in  England,  are  not  known  to  our  law,  and 
therefore  hereditaments  and  tenements  are  substantially  equivalent  terms  in 
the  United  States.  Corporeal  hereditaments,  or  tenements,  are  things  material, 
such  as  lands,  houses,  etc. ;  incorporeal  hereditaments,  or  tenements,  are  intan- 
gible rights  arising  out  of  material  things,  such  as  the  right  to  collect  rent  out 
of  lands,  the  right  to  exercise  the  franchise  to  maintain  a  toll  bridge  or  a  ferry, 
or  the  right  to  take  ore  out  of  another's  land. 


5.  Practical  differences  between  real  and  perso7ial  property. 
These  practical  differences  once  existed,  and  unless  modified  by 
statute  still  exist,  between  real  and  personal  property. 

a.  On  the  death  of  an  owner  leaving  no  will,  real  property 
goes  to  his  heirs,  while  personal  property  goes  to  the  adminis- 
trator to  pay  debts  and  then  to  be  distributed  among  the  next  of 
kin.  The  next  of  kin  who  take  personalty  are  often  different 
from  the  heirs  who  take  realty,  but  modern  statutes  tend  to  make 
the  two  classes  identical.  So  also  statutes  often  give  the  realty 
as  well  as  the  personalty  into  the  hands  of  the  administrator. 

/;.  The  right  of  a  wife  to  an  estate  of  dower,  or  of  a  husband 
to  an  estate  by  the  curtesy,  exists  in  realty  but  not  in  personalty. 

c.  In  general,  more  formality  is  necessary  to  transfer  realty, 
as  a  deed,  while  personalty  may  be  transferred  merely  by  delivery. 

d.  The  law  of  the  place  where  realty  is  situated  governs  rights 
in  it,  while  rights  in  personalty  are  governed  by  the  law  of  the 
place  of  domicile  of  its  owner. 

r.  In  general,  the  law  as  to  realty  is  technical,  derived  from 
feudal  times,  while  the  law  as  to  personalty  is  more  lilx-ral  and 
modern. 


264  REAL  PROPERTY  [Cii.  XIV 

The  logical  distinction  is  between  movables  and  immovables.  This  dis- 
tinction exists  in  the  nature  of  things,  but  the  historical  distinction  based 
upon  estates  in  lands  is  fundamental  in  the  I^nglish  and  American  law. 

160.  Estates  in  land  ;  duration.  An  estate  is  the  interest  which 
one  has  in  real  property.  As  land  is  permanent  and  is  not  con- 
sumed or  diminished  in  the  ordinary  use  of  it,  there  may  be  dif- 
ferent estates  in  the  same  parcel  of  land,  one  succeeding  another 
in  possession  and  enjoyment.  One  persop  may  own  an  estate 
and  have  possession  and  enjoyment,  while  another  also  owns  an 
estate  but  his  possession  and  enjoyment  are  postponed  until  the 
termination  of  the  first  estate. 

Estates  in  land  arc  first  of  all  divided  into  (i)  freehold  estates  and 
(2)  estates  less  than  freehold.  The  first  we  have  seen  are  real  estate, 
while  the  second  are  personal  estate  and  are  often  called  chattels  real. 

I .  Freehold  estates.  A  freehold  estate  is  one  which  is  to  endure 
for  a  period  not  fixed  or  ascertained,  that  is,  either  forever  or  for 
a  life.  Freehold  estates  are  therefore  of  two  kinds  :  (a)  estates  of 
inheritance,  also  called  estates  in  fee ;  {b)  life  estates,  either  for 
the  life  of  the  owner  or  for  the  life  of  some  other  person. 

a.  Estates  of  inheritance,  or  estates  in  fee,  are  of  two  classes  : 
first,  estates  in  fee  simple,  which  descend  to  one's  heirs  generally, 
collateral  heirs  as  well  as  lineal  heirs  ;  second,  estates  in  fee  tail, 
which  descend  only  to  one's  heirs  in  the  direct  line  and  may  be 
limited  to  particular  heirs,  as  male  heirs,  the  eldest  male  heir,  etc. 
Estates  in  fee  tail  have  been  abolished  or  modified  in  many  of  our 
states.  The  estate  in  fee  simple  is  the  usual  estate  of  inheritance 
in  this  country.  In  order  to  create  it  in  a  deed,  the  conveyance  at 
common  law,  and  still  where  not  changed  by  statute,  must  run  to 
the  grantee  and  his  heirs,  as  "  to  A.  B.  and  his  heirs."  If  it  runs 
"to  A.  B.,"  or  even  "to  A.  B.  and  his  children,"  or  "to  A.  B. 
forever,"  it  would  give  A.  B.  only  a  life  estate.  This  technical 
rule  has  been  quite  generally  changed  by  statutes  which  provide 
that  a  deed  "  to  A.  B."  shall  carry  a  fee  simple  unless  a  contrary 
intention  appears.  In  a  will  the  use  of  the  word  "  heirs  "  is  not 
necessary  to  carry  a  fee,  if  it  appears  to  be  the  intent  of  the  testator 
to  devise  a  fee. 

b.  Life  estates  are  of  two  classes  :  first,  conventional  life  es- 
tates, or  those  created  by  deed  or  will ;  second,  legal  life  estates, 


§  160]  ESTATES  265 

or  those  created  by  law.  A  life  estate  of  the  first  class  may  be  for 
the  life  of  the  tenant  or  for  the  life  of  another  person  {piir  autre 
vie).  A  life  estate  of  the  second  class  may  be  an  estate  of  dower 
or  an  estate  by  the  curtesy.  An  estate  of  dozvcr  is  the  estate  which 
a  surviving  wife  has  during  the  rest  of  her  life  in  07ie  third  of  the 
lands  and  tenements  of  which  lier  husband  was  seised  in  fee  dur- 
ing the  marriage,  and  which  she  has  not  released  by  joining  with 
him  in  a  deed  of  conveyance  or  otherwise.  Dower  has  been  abol- 
ished in  some  states,  and  the  widow  is  often  given  an  absolute 
share  instead  of  a  life  estate  in  a  third.  An  estate  by  the  curtesy 
is  the  estate  which  a  sur\'iving  husband  has  during  the  rest  of  his 
life  in  all  the  lands  and  tenements  of  which  the  wife  was  seised 
in  fee  during  the  marriage,  provided  there  was  a  child  of  the 
marriage  born  alive  and  capable  of  inheriting,  although  the  child 
may  have  died  before  the  mother.  The  husband  may  release  this 
right  by  joining  with  the  wife  in  a  conveyance.  Curtesy  has  been 
abolished  or  modified  by  statute  in  many  states. 

A  homestead  estate  is  a  creation  of  statute,  and  consists  in  the  right  to 
enjoy,  free  from  liability  for  debts,  a  certain  specified  quantity  of  land  occupied 
as  a  residence.  It  is  not  strictly  an  estate,  but  a  right  of  exemption  attached 
to  an  estate.  It  extends  generally  to  the  head  of  a  family,  that  is,  one  who  is 
under  a  legal  or  moral  duty  to  support  those  living  with  him.  The  amount  of 
land  so  exempted  differs  in  different  states,  and  in  the  same  state  more  is 
allowed  in  the  country  than  in  a  city.  Some  states  fix  it  by  area,  some  by 
value,  and  some  by  both.  It  is  usually  provided  that  a  husband  cannot  transfer 
a  homestead  estate  without  his  wife's  consent.  In  many  states  on  the  death  of 
a  husband  the  widow  succeeds  to  the  homestead  right,  or,  if  there  is  no  widow, 
the  minor  children.  These  statutes  vary  so  widely  that  it  would  be  impossible 
to  consider  them  here  in  detail. 

2.  Estates  less  than  a  freehold.  These  estates  are  also  called 
leasehold  estates  and  chattels  real,  and  are  for  a  fi.xed  or  deter- 
minable period  of  time.  They  are  of  four  classes  :  {a)  estates 
for  years,  {b)  tenancies  at  will,  (r)  tenancies  from  year  to  year, 
{d)  tenancies  by  sufferance. 

{a)  An  estate  for  years  is  an  estate  limited  for  a  certain  definite 
time,  as  an  estate  for  one  month,  or  for  one  year,  or  for  ten  years, 
or  for  one  hundred  years.  It  is  usually  created  by  a  lease,  and 
hence  is  often  called  a  Ica.sehold.  What  remains  in  the  owner 
is  called  a  reversion,  because  possession  reverts  to  him  upon  the 


266 


lULAL  PROPERTY 


[Cii.  XIV 


termination  of  the  lease.  Leaseholds  are  considered  under  the 
subject  of  Landlord  and  Tenant  (see  sect,  i"]"]  post). 

(b)  A  tenancy  at  will  is  a  tenancy  which  may  be  terminated  at 
the  will  of  either  the  lessor  or  the  lessee.  These  are  not  favored 
in  the  law,  and  wherever  possible  a  tenancy  is  construed  as  from 
year  to  year  instead  of  at  will.  Some  statutes  require  a  previous 
notice  in  order  to  terminate  the  tenancy, 

(<•)  A  tenancy  from  year  to  year  is  a  tenancy  for  one  week, 
month,  quarter,  or  year  certain,  continuing  for  a  successive  simi- 
lar period  unless  due  notice  be  given  to  terminate  it  at  the  end 
of  the  first  or  any  subsequent  period.  In  case  of  a  tenancy  for  a 
year  continued  into  a  second  year,  notice  of  an  intent  of  either 
party  to  terminate  it  is  required.  The  statutes  fix  this  ;  in  some 
states  it  is  six  months,  in  others  three  months,  etc.  In  case  of 
a  tenancy  from  quarter  to  quarter,  month  to  month,  or  week  to 
week  the  notice  must  usually  equal  the  period  in  length,  being 
a  quarter,  a  month,  or  a  week  respectively. 

{d)  A  tenancy  by  sufferance  is  a  tenancy  which  arises  when  a 
tenant  remains  in  possession  at  the  end  of  his  term  without  the 
landlord's  consent,  as  where  he  has  had  notice  to  quit.  If  the 
landlord  consents  to  the  holding  over,  the  tenancy  becomes  one 
from  year  to  year.  If  he  does  not  consent,  he  may  by  proper 
proceedings  have  the  tenant  removed  from  the  land.  Most  states 
now  have  statutes  forbidding  a  forcible  entry  by  the  landlord. 

The  above  estates  may  be  thus  outlined  : 


'  Freehold 
estates 


Estates 
in 
land 


In  fee  f  Fee  simple 

(inheritance)  \  Fee  tail 


Estates  less  than 
a  freehold,  or  « 
leaseholds 


For  life 

'  For  years 
At  will 

From  year  to  year 
By  sufferance 


Conventional 

For  one's  own  life 

For  the  life  of  another 
(^pur  autre  vie) 
Legal 

Dower 

Curtesy 

Homestead 


§  161]  ESTATES  267 

161.  Future  estates  in  land  :  reversions  and  remainders.  When 
an  estate  for  life  or  for  years  is  created,  there  is  an  estate  in 
residue  to  commence  in  possession  when  the  life  estate  or  estate 
for  years  ends.   Such  an  estate  is  either  a  reversion  or  a  remainder, 

1.  Reversions.  A  reversion  is  the  residue  left  in  the  grantor 
or  his  heirs  after  the  granting  of  the  lesser  estate.  It  commences 
in  enjoyment  only  when  the  lesser  estate  is  ended.  Meanwhile  it 
can  be  freely  disposed  of  and  other  lesser  estates  may  be  car\'ed 
out  of  it. 

Examples  .•  i .  R  leases  land  to  T  for  ten  years.  R  has  a  reversion  in  the 
land  to  commence  in  possession  when  T"s  leasehold  expires. 

2.  R  afterwards  grants  L  a  life  estate  in  the  land.  R  now  has  a  reversion  to 
commence  in  possession  when  both  T's  and  L's  estates  are  at  an  end.  L's 
estate  for  life  is  subject  to  T's  leasehold,  and  can  commence  in  possession 
only  when  T's  estate  is  ended.  Should  L  die  before  T's  tenancy  expires,  the 
life  estate  would  be  of  no  value. 

3.  R  may  sell  his  reversion,  and  the  grantee  will  get  the  same  rights  as  R 
had.    So  also  L  and  T  may  sell  their  estates. 

2.  Remainders.  A  remainder  is  an  estate  granted  to  take 
effect  in  possession  at  the  termination  of  another  estate  created 
by  the  same  instrument.  The  other  estate  must  be  less  than  a 
fee  simple,  for  nothing  remains  to  be  granted  after  a  fee  simple, 
A  remainder  is  vested  if  the  person  who  is  to  have  it  is  in  being 
and  ascertained  ;  it  is  contingent  if  the  person  is  not  in  being  or 
is  uncertain,  but  it  becomes  vested  when  such  person  is  ascer- 
tained. A  vested  remainder  may  be  transferred,  and  if  not  trans- 
ferred it  will  pass  to  the  heir  of  the  remainderman  upon  the 
death  of  the  latter. 

Examples :  4.  X  grants  by  deed  a  life  estate  to  L  and  a  remainder  in  fee 
to  R.    R  has  a  vested  remainder,  and  may  sell  or  otherwise  dispose  of  it. 

5.  .X  grants  by  deed  a  life  estate  to  L,  with  a  remainder  for  life  to  M  and  the 
remainder  in  fee  to  R.  Here  M  has  a  remainder  for  life  after  L's  death,  and  R  a 
remainder  in  fee  to  be  enjoyed  in  possession  after  the  death  of  both  L  and  M. 

6.  X  grants  a  life  estate  to  L,  with  the  remainder  in  fee  to  L's  eldest  son. 
L  has  no  son.  The  remainder  is  contingent.  If  a  son  be  born  to  L,  the 
remainder  is  then  vested  in  the  son. 

7.  X  grants  a  life  estate  to  L,  with  the  remainder  to  L's  eldest  son  living 
at  L's  death.  The  remainder  is  contingent  and  cannot  become  vested  until  L's 
death,  and  then  only  if  there  be  a  son  of  L  living  at  the  time.  .Should  there 
be  none,  the  estate  would  revert  to  X  or  his  heirs. 


268  RKAT,  PROPFRTV  .  [cii.  XIV 

A  grant  to  L  for  life,  with  a  remainder  in  fee  "  to  his  heirs,"  was  construed 
at  common  law  to  give  a  fee  to  L.  This  is  known  as  the  "  rule  in  Shelley's 
case."  This  technical  rule  has  been  abolished  by  statute  in  many  states,  but 
as  it  remains  in  some,  it  is  undesirable  to  use  that  phrase  to  describe  the 
remaindermen. 

162.  Estates  held  jointly  or  in  common.  Any  estate  in  land 
may  be  owned  by  one  person  in  severalty  or  by  two  or  more  con- 
currently. The  two  principal  concurrent  estates  are  known  as  a 
joint  tenancy  and  a  tenancy  in  common. 

Joitit  tenancy.  When  two  or  more  persons  were  granted  an 
estate  together  by  the  same  instrument,  the  common  law  con- 
strued the  estate  to  be  one  in  joint  tenancy  unless  the  language 
showed  some  different  intent.  The  characteristic  of  the  estate 
was  that  if  one  of  the  persons  died,  the  survivors  took  his  share 
to  the  exclusion  of  his  heirs  or  devisees.  Many  statutes  now 
provide  that  such  an  estate  shall  be  a  tenancy  in  common. 

Example.  X  by  will  devised  his  farm  to  his  three  sons,  A,  B,  and  C.  This 
was  a  joint  tenancy.  If  A  died,  B  and  C  owned  the  farm.  If  B  then  died,  C 
owned  it  in  severalty.  But  if  A  conveyed  his  interest  to  D,  the  joint  tenancy 
was  destroyed  and  it  became  a  tenancy  in  common  by  B,  C,  and  D.  (A  devise 
or  grant  to  A,  B,  and  C  would  now  in  many  states  be  held  to  create  a  tenancy 
in  common.) 

Tenancy  in  common.  When  two  or  more  persons  hold  un- 
divided interests  in  land  under  separate  instruments,  or  under 
an  instrument  which  shows  an  intent  that  each  shall  hold  his 
interest  as  a  separate  or  individual  one,  there  is  a  tenancy  in 
common  ;  and  statutes  now  generally  provide  that  all  convey- 
ances or  devises  to  two  or  more  shall  be  deemed  to  be  tenancies 
in  common  unless  expressed  to  be  joint  tenancies,  and  that 
heirs  shall  take  as  tenants  in  common.  The  characteristic  is 
that  on  the  death  of  a  tenant  in  common  his  share  goes  to 
his  heirs  or  devisees.  The  tenancy  may  be  ended  by  a  partition 
of  the  estate. 

Exajuple.  X  devises  his  farm  to  A,  B,  and  C  as  tenants  in  common.  Each 
owns  an  undivided  one  third.  On  the  death  of  one  his  part  will  go  to  his 
heirs.  They  may  partition  the  farm  so  that  each  will  get  a  definite  portion  of 
it  in  severalty.  Should  A  purchase  B's  and  C's  portions,  A  would  own  the 
whole  farm  in  severalty. 


§  163]  ESTATES  269 

Partnership  real  estate.  As  a  partnership  is  not  a  legal  entity,  it  cannot 
take  title  to  real  estate,  and  a  conveyance  to  the  partnership  would  be  in- 
effective for  want  of  a  grantee.  The  title  is  conveyed  to  the  partners  individ- 
ually, and  they  become  tenants  in  common,  but  hold  the  property  subject  to 
partnership  debts  and  to  the  final  accounting  among  themselves.  Upon  the 
death  of  a  partner,  title  to  his  share  in  the  realty  goes  to  his  heirs,  but  they 
hold  it  practically  in  trust  for  the  partnership  business  until  that  is  wound  up. 

Tenancy  by  entireties.  When  an  instrument  conveys  lands  to  two  persons 
who  are  husband  and  wife,  they  take  an  estate  by  the  entireties.  The  charac- 
terisdc  is  that  whichever  survives  gets  the  whole  estate,  and  this  result  cannot 
be  defeated  by  a  prior  conveyance  by  the  deceased  party.  This  estate  has 
been  somewhat  modified  by  statute. 

Community  property.  In  Arizona,  California,  Idaho,  Louisiana,  Nevada, 
New  Mexico,  Texas,  and  Washington  whatever  is  acquired  by  the  labor  or 
efforts  of  either  a  husband  or  his  w^ife  after  the  marriage  belongs  one  half  to 
each.  This  does  not  include  property  owned  at  the  time  of  the  marriage,  or 
property  received  by  way  of  gift,  devise,  or  descent.  This  idea  came  through 
the  civil  (modem  Roman)  law  at  a  time  when  the  Spanish  or  the  French 
owned  the  territory  from  which  these  states  were  carved. 

163.  Equitable  estates  :  trusts.  It  is  also  possible  to  divide 
the  estates  in  land  so  that  one  person  has  the  recognized  estate 
and  title  in  a  law  court  and  another  person  in  an  equity  court, 
and  thus  create  what  are  known  as  trusts,  A  trust  is  the  obliga- 
tion, enforced  in  an  equity  court  against  the  holder  of  the  legal 
title  to  property  (the  trustee),  to  account  to  another  person  (the 
beneficiary)  for  the  income  and  profits  of  the  property. 

Example  i.  X  devises  lands  to  T  to  receive  the  rents  and  income  and 
pay  the  same  to  B  during  B's  life,  and  then  to  convey  to  C.  T  has  the  legal 
title  in  fee  simple.  B  has  an  equitable  life  estate  and  C  has  an  equitable  fee  in 
remainder.  No  one  could  disturb  T's  title  in  a  law  court;  but  in  an  equity 
court  B  and  C  may  compel  him  to  perform  the  trust.  When  B  dies,  there 
must  be  a  conveyance  to  C,  who  will  then  have  the  legal  title. 

A  charitable  trust  is  one  created  for  the  benefit  of  the  public 
or  of  an  indefinite  number  of  persf)ns  con.stituting  a  class  of  the 
public.  Such  trusts  are  enforced  iw  a  jniblic  ofTicer,  usually  the 
attorney-general  of  a  state. 

Example  2.  X  conveys  lan<l  or  other  property  to  T  (and  his  successors,  to 
be  named  by  the  court),  to  receive  the  rents  and  jirnfits  and  apply  the  .same 
to  the  relief  of  the  poor  of  the  city  of  A,  or  to  the  maintenance  of  a  scliool, 
or  to  maintain  a  public  park,  etc. 


270  REM,    1'R()!'I':RI"\'  [Cm.  XIV 

11.    L.wn  :  ITS  Constituents,  (iKownis,  and  I'^ixtukes 

164.  Extent  of  ownership  :  soil,  air,  minerals,  waters.  When 
one  owns  land  he  controls  the  space  above  and  below  it.  If  limbs 
of  trees  project  into  the  air  above  his  land,  he  may  cut  them  off 
to  the  boundary  line.  If  roots  grow  into  his  soil  from  an  adjoin- 
ing estate,  he  may  cut  them  off.  I  le  owns  all  the  minerals  in  the 
land,  including  mineral  oils  and  gases,  subject  only  to  any  reserved 
right  in  the  state.  In  England  all  gold  and  silver  mines  belonged 
at  common  law  to  the  king,  but  in  this  country  such  rights  are 
in  the  landowner.  Congress  has  provided  by  legislation  for  the 
establishment  of  mining  claims  in  public  lands. 

A  lode,  or  vein  (a  line  of  metal  embedded  in  quartz  or  rock),  may  be  located 
to  the  extent  of  i  500  feet  in  the  direction  in  which  it  runs,  and  300  feet  on 
each  side.  A  placer  (ground  containing  mineral  in  earth,  sand,  or  gravel  in  a 
loose  state)  may  be  located  by  one  person  or  association  of  persons  to  the  ex- 
tent of  1 60  acres.  The  locator  of  a  claim  must  do  work  or  make  improvements 
thereon  at  least  to  the  extent  of  ;?  1 00  in  each  year,  or  he  forfeits  his  claim. 

The  owner  of  land  has  a  right  to  use  a  reasonable  quantity  of 
the  water  flowing  over  his  land  in  a  stream,  although  he  cannot 
unreasonably  divert  the  waters  to  the  damage  of  a  lower  owner. 
If  he  owns  the  lands,  he  owns  the  ice  formed  over  them.  Lands 
under  navigable  waters  generally  belong  to  the  state.  This  is 
almost  invariably  true  as  to  tide  waters,  but  states  differ  as  to  the 
ownership  of  the  lands  under  navigable  streams.  In  the  case  of 
lakes,  the  larger  ones  generally  belong  to  the  state,  while  smaller 
ones  belong  to  private  persons.  If  one  owns  the  fee  under 
waters,  he  has  the  exclusive  right  to  fish  in  such  waters. 

165.  Vegetable  products.  Vegetable  products  are  divided  into 
two  classes. 

I.  Friictus  natiiralcs.  Vegetable  products  that  are  not  the 
result  of  annual  labor  and  fertilizing  are  classed  as  perennials, 
ox  fnictus  iiatu rales.  Such  are  trees,  bushes,  and  grasses.  Some 
perennials,  as  hops,  have  been  excluded,  because  the  crop  is 
dependent  upon  annual  cultivation.  Fruit  upon  trees  and 
bushes  has  usually  been  included,  although  often  the  result  of 
annual  cultivation.  Fnictus  naturales  are  regarded  as  a  part 
of  the  realty. 


1 


§166]  LAND  AND   FIXTURES  2^\ 

2,  Fnictus  indjistrialcs.  Vegetable  products  that  are  the  result 
of  annual  labor  and  fertilization  are  classed  ■d.'s,  fnictus  indiistrialcs. 
Such  are  grains,  vegetables,  and  other  annual  crops.  These  are 
regarded  as  personalty  and  not  as  a  part  of  the  realty.  If  one  has 
an  estate  of  uncertain  duration,  and  it  is  terminated  before  the 
crops  he  has  planted  have  ripened,  he  or  his  representatives  may 
enter  and  cultivate  and  gather  the  crops.  This  is  called  the  right 
to  emblements.  But  if  his  tenancy  is  for  a  definite  period,  he 
cannot  enter  after  the  tenancy  expires.  If  the  owner  of  a  fee  dies 
while  crops  are  ripening,  they  go  to  his  executor  and  not  to  his 
heir.  Growing  crops  are  personalty,  and  hence  a  sale  of  them 
falls  within  the  seventeenth  section  of  the  Statute  of  Frauds.  A 
sale  of  growing  perennials  to  be  severed  under  the  contract  of  sale 
is  regarded  as  a  sale  of  goods  under  the  Uniform  Sales  Act. 

3.  Border  trees.  A  tree  growing  on  the  boundary  line  between 
the  lands  of  different  owners  is  owned  by  them  as  tenants  in  com- 
mon. Neither  can  lawfully  move  or  destroy  it  as  a  whole  ;  but 
one  may  cut  the  branches  on  his  side  if  he  does  not  injure  the 
trunk.  If  the  trunk  is  wholly  on  one  side  of  the  boundary,  the 
tree  belongs  to  that  landowner ;  the  other  landowner  may  cut  off 
the  overhanging  branches  but  cannot  appropriate  them  or  the 
fruit  on  them. 

166.  Fixtures.  A  fixture  is  an  article  which,  originally  personal 
property,  has  by  annexation  to  land  come  to  be  regarded  as  realty. 
It  is  often  a  nice  and  difficult  question  whether  or  not  the  article  so 
annexed  has  become  a  fixture  and  so  has  ceased  to  be  personalty. 

This  question  often  arises  between  a  vendor  and  a  vendee  of  lands ;  between 
a  mortgagor  and  a  mortgagee  of  lands ;  between  the  heir  or  devisee  of  a  land- 
holder and  his  executor;  between  the  reversioner,  or  remainderman,  and  the 
tenant  for  years  or  the  executor  of  a  tenant  for  life ;  between  the  mortgagee 
of  the  owner's  lands  and  the  mortgagee  of  his  personalty ;  between  the  land- 
owner and  a  judgment  creditor  who  levies  on  the  article  as  personalty ;  etc. 
The  question  usually  is,  however,  whether  one  who  is  taking  possession  of 
the  land  may  hf)ld  the  article  as  a  part  of  the  realty  or  whether  the  one  who 
is  quitting  the  land,  or  his  representatives,  may  sever  the  article  and  take  it 
as  personalty. 

While  the  matter  is  a  complicated  and  tanglrd  one,  (In-  fol- 
lowing rules  will  serve  as  a  fairly  reliable  guide  tluough  the 
labyrinth. 


2-J2  Ri:.\l,   IM^OPF.RTY  [Ch.  XIV 

1.  In  order  to  be  in  any  event  elassed  as  a  fixture,  the  artiele 
must  be  plnsieallv  annexed  to  the  land  or  to  some  strueture  or 
thing  itself  physieally  annexed. 

Exceptions.  (</)  If  the  article  is  an  essential  part  of  an  annexed  article,  it 
may  be  a  fixture,  although  itself  a  movable,  as  an  adjunct  or  part  of  a  machine, 
or  the  keys  to  a  house.  (/')  If  the  ardcle  is  of  great  weight  and  is  kept  in 
place  by  gravity  without  actual  physical  attachment,  it  may  be  a  fixture,  as  a 
building,  or  a  machine,  or  a  colossal  statue,  {c)  If  the  article  has  been  fitted 
and  appropriated  to  a  purpose  which,  when  carried  out,  would  make  it  a  fixture, 
it  may  be  constructively  a  fixture,  as  fence  rails  laid  along  a  line  for  a  fence 
begun  but  not  yet  finished. 

2.  If  the  article  is  so  annexed  that  to  remove  it  would  materi- 
ally injure  what  remains,  or  destroy  the  article  itself,  it  must  be 
regarded  as  a  fixture  and  irremovable. 

Example  i.  Water  and  gas  pipes  built  into  a  house  are  so  annexed  that 
they  cannot  be  removed  without  tearing  out  floors  or  partitions.  But  if  simply 
attached  to  walls  or  floors  by  hooks,  they  might  be  removed  under  3,  below. 

3.  If  the  article  may  be  removed  without  injury  to  the  free- 
hold or  destruction  of  the  article  itself,  then  the  question  whether 
it  is  or  is  not  regarded  as  a  fixture  often  depends  upon  the 
relation  of  the  one  who  annexed  it  to  the  land. 

a.  If  the  annexer  is  the  owner  in  fee  of  the  land,  and  the  arti- 
cle is  calculated  to  improve  the  land,  then  the  article  becomes 
a  fixture.  If  the  owner  sells  or  mortgages  the  land,  the  fixture 
goes  with  it.  If  the  owner  dies,  the  fixture  goes  to  the  heir  or 
devisee  and  not  to  the  executor.  Of  course  the  owner,  while 
he  is  owner,  may  sever  the  article  and  make  it  again  person- 
alty, or  he  may  by  express  stipulation  reserve  it  from  a  sale  or 
mortgage,  or  he  may  by  will  direct  it  to  be  severed  and  treated 
as  personalty. 

Example  2.  Buildings,  fences,  machinery  attached  to  a  structure,  furnaces 
and  steam-heating  apparatus,  bars  and  counters  in  business  structures,  book- 
cases attached  to  the  walls,  paintings  on  canvas  cemented  to  the  walls,  heavy 
stone  statues,  and  the  like  have  all  been  held  to  be  fixtures.  But  gas  fixtures, 
such  as  chandeliers,  have  been  held  to  be  removable  furniture. 

^.  If  the  annexer  is  a  tenant  of  the  land,  and  the  annexation 
was  for  purposes  of  trade  or  domestic  convenience,  the  article 
may  be  removed  by  the  tenant  at   the  expiration  of   the  term. 


§§167,  16SJ  RELATIVE  RIGHTS  273 

The  law  favors  the  tenant  in  adapting  the  land  and  structures 
to  the  use  to  which  he  wishes  to  put  them  during  the  tenancy, 
and  permits  him  to  remove  annexations  if  he  can  do  so  without 
too  serious  an  injury  to  what  remains.  He  must  exercise  this 
right  before  he  surrenders  possession.  If  he  renews  his  lease, 
he  should  in  the  new  lease  expressly  reserve  the  right  to  remove 
articles  annexed  under  the  former  lease  or,  according  to  some 
authorities,  he  abandons  them  as  fixtures. 

Example  3.  Buildings  not  let  into  the  soil,  engines,  boilers,  and  other 
machinery  of  trade,  counters,  cases  of  shelving,  and  other  store  furniture,  chairs 
fastened  to  the  floor  of  a  theater,  gas  fixtures,  and  the  like  have  all  been  held 
to  be  removable  by  a  tenant.  The  limit  would  be  fixed  when  the  removal  would 
do  a  serious  injury  to  the  building  belonging  to  the  landlord,  and  upon  this 
test  many  of  the  above  articles  have  been  held  to  be  fixtures  even  as  between 
landlord  and  tenant.  Moreover,  courts  differ  sometimes  even  upon  substantially 
the  same  facts. 

III.    Relative  Rights  oe  Adjoining  Ow^ners 

167.  Fences :  cattle  trespass.  At  common  law  the  owner  of 
cattle  is  bound  to  fence  them  in  or  otherwise  restrain  them. 
The  owner  of  crops  is  not  bound  to  fence  against  trespassing 
cattle.  Statutes  have  in  many  states  changed  or  modified  these 
rules,  and  in  some  the  matter  is  left  to  local  authorities  to  regu- 
late. Very  generally,  however,  statutes  have  imposed  upon  rail- 
roads the  duty  of  fencing  their  property  so  as  to  avoid  injury  to 
trespassing  cattle. 

In  many  states  there  are  statutes  compelling  adjoining  owners 
to  maintain  a  partition  fence  at  their  joint  expense. 

168.  Air  and  waters ;  support  of  land.  One  owner  is  not  per- 
mitted to  pollute  the  air  over  a  neighbor's  land  by  smoke,  dust,  or 
odors  in  a  manner  unreasonably  to  disturb  the  neighbor's  enjoy- 
ment of  his  property.  Neither  can  he  unreasonably  disturb  it  by 
noises  or  vibrations.  The.se  acts  constitute  a  nuisance  for  which 
damages  may  be  recovered  or  an  injunction  issued. 

One  owner  cannot  pollute  waters  fiowing  from  his  land  to  that  of 
a  neighbor,  nor  unreasonably  divert  the  waters  or  appropriate  them. 

One  owner  cannot  remove  the  lateral  support  of  a  neighbor's 
land  by  digging  so  near  the  boundary  as  to  cause  the  neighbor's 


274  RKAL   PRC^PERTY  [Cm.  XIV 

land  to  cave  in.  This  docs  ilbt  extend  to  the  support  of  buildings 
but  only  of  the  land  in  the  natural  condition.  But  one  excavating 
may  be  liable  for  negligence  or  for  want  of  notice  if  another's 
building  is  injured  thereby. 

169.  Easements.  An  easement  is  a  right  by  one  person  to  do  or 
to  compel  anotlicr  to  refrain  from  doing  some  act  on  that  other's 
land.  It  may  be  acquired  by  grant  or,  in  some  cases,  by  prescrip- 
tion, that  is,  by  the  adverse  use  of  the  right  for  a  specified  period, 
usually  twenty  years. 

One  cannot  by  prescription  acquire  a  right  to  have  light  and 
air  come  to  his  land  from  his  neighbor's  land,  but  he  may  by 
grant.  Thus,  A  buys  land  of  B,  and  the  latter  agrees  not  to 
build  nearer  the  line  than  twenty  feet.  This  gives  A  an  easement 
to  that  extent  in  the  light  and  air  from  B's  land. 

One  may  by  prescription  or  by  grant  acquire  a  right  of  way 
over  another's  land.  If  one  sells  to  another  land  not  adjoining  a 
highway,  there  is  a  "way  of  necessity"  over  the  seller's  remaining 
land  in  order  to  reach  the  highway. 

One  may  acquire  a  right  to  use  a  party  wall,  or  to  drain  water, 
or  to  take  water,  or  to  compel  another  to  maintain  a  partition 
fence,  and  the  like.    All  these  are  easements. 

A  highway  over  one's  land  is  an  easement  for  the  benefit  of 
the  public  generally,  who  acquire  thereby  a  right *to  pass  to  and 
fro.  Of  course  the  public  may,  and  sometimes  does,  own  the  fee 
also.  But  if  the  fee  remains  in  a  private  individual,  he  may  use 
it  for  any  purpose  not  inconsistent  with  the  right  of  the  public. 
He  is  entitled  to  the  vegetable  growth,  and  he  may  forbid  others 
to  cut  trees  or  grass,  or  pasture  cattle,  or  hunt  or  fish  there. 

IV.    Transfer  of  Interests  in  Lands 

170.  Contract  of  sale.  A  contract  to  sell  lands  or  any  interest 
in  lands  must  be  in  writing  and  be  signed  by  the  party  to  be 
charged  (see  sect.  22).  While  the  writing  may  be  an  informal 
instrument  (a  memorandum),  it  is  usual  to  have  a  somewhat 
formal  one  setting  out  the  terms  of  the  agreement  in  full.  It 
should  be  signed  by  both  parties  in  order  that  both  may 
be   held. 


Land  Contract 

^ttitU^  of  Agreement,   Made  this.— -T-..'?AP.thrT-T.day  ofTr:Tr.J?.'?e.rTTT 
in  the  year  One  thousand  nine  hundred  and.?.i.^>.?.?.'?.rTTTT: 

^cttpeen .^'^]?^rd..  Baker ; , 


of  the  city  of  Binghamton.  County  of  Broome,  State  of  New  York. 


^ Nelson  Hopkins. 


■.of  the  first  part, 


an 

of  the   City  of  Syracuse,    County  of  Onondaga,    State  of  New  York, 

of  the  second  part,  in  the  manner  following :  The  said  parties  have  and  hereby 
do  mutually  covenant  and  agree  as  follows  :  The  /iiri  y  of  the  first  part  to  sell, 
and  the  party  of  the  second  part  to  purchase,  9111   tl)at   CraCt   OF   parcel 

of  LanU,  situate  in  the 9:}^y.. of ?.i.".g^.??.tp.P. County  of 

— — — .Br.P.P.*??. and  State  of  New  York,  briefly  described  as  follows: 

Beginning  at  a  point  one  hundred    (100)    feet  east  of   the  northeasterly 
corner  of  Ashland  Avenue  and  Sununer  Street,    on   the  northerly  line   of 
Summer  Street,    and  running  thence  northerly  and  parallel  with  Ashland 
Avenue  one  hundred  and   fifty   (150)    feet;    thence  easterly  and  parallel 
with  Suamer  Street   forty    (40)    feet;    thence   southerly  and  parallel  with 
Ashland  Avenue   one  hundred  and   fifty   (150)    feet;    thence  westerly 
the  northerly  line  of  Summer  Street  to   the  place  of  beginning,  ^_^_^___ 


for  the  sum  of...^.''.?.lyP...VhP.H?.^P!^. Dollars 

($  ^ ?.•. P 9.9. -..9 9. TTrr:),  which  sum  the  said  part  y  of  the  second  part  hereby  agree  a 

to  pay  to  the /ar/ y    of    the    first    part  as   follows  :.... s.i.x.. thousand  doUara 

($6,000.00)    on   the   first  day  of  July,    1915,    and  six   thousand  dollars 

($6,000.00)    on  the   first  day  of  January.    1917. 

Said  part  y  of  the  second  part  also  agree  a  to  pay  ALL  taxes  and  assessments 
which  shall  be  taxed  or  assessed  upon  said  premises  from  the  date  hereof  until 
the  said  sum  shall  be  fully  paid  as  aforesaid. 

And  the  said  part  y  of  the  first  part,  on  receiving  such  payment.—— ■ 

' at  the  time  and  in  the  manner  above 


mentioned,  shall,  at ^.^.? own  proper  cost  and  expense,  execute  and 

deliver  to  the  said  party   of    the  second  part,  or  to ^ ?.? assigns,  a 

warranty  deed,    for   the   conveying  and  assuring   to  him,    or   them,    the   fee _ 
eimple  of  the  aaid  r'-»"<°-»°  — . ___________ 

It  is  agreed  that  the  part  y  of  the  second  part  shall  have  possession  of  said 
premises  from  and  after..t^Q..f^r.8.t..day..pf  July,  .1916, 

And  it  is  agreed  that  the  stipulations  aforesaid  are  to  apply  to  and  bind  the 
heirs,  executors,  administrators  and  assigns  of  the  respective  parties. 

^^n    ?3^itnf£fflf    ?i?bCrCOf,    The  said  parties  have  hereunto  set  their 
hands  and  suals  the  day  and  year  first  above  written. 

3n  presence  of  §fh!^.(^Ml:'...3(k^&....C^ 

/ •«  SRAL« 

[AcknowlcdKnicnt  hy  both  parties  (sec  p.  2^5).     Tlic  contract  is  good  without  an  ac  ktinwlcdg- 
ment,  Imt  could  not  be  recorded.] 

-7:) 


2"]^  RKAT,   rROPKUTV  [Cm.  \1V 

The  legal  title  does  not  pass  at  the  lime  of  makinf;  the  con- 
tract, as  it  docs  in  the  case  of  the  sale  of  personal  property  ;  but 
equity  for  many  purposes  regards  the  title  as  having  passed  to  the 
vendee  from  the  time  the  contract  is  made,  although  payment 
and  delivery  of  the  deed  are  postponed.  As  equity  regards  the 
vendee  as  the  true  owner,  it  will  compel  the  vendor  to  execute  the 
conveyance  by  what  is  known  as  specific  performance  of  contract. 

Equity  regards  the  land  as  already  a  part  of  the  vendee's  realty,  so  that  if 
he  dies,  his  heir  can  compel  his  executor  to  pay  for  it  out  of  the  personalty, 
and  the  deed  from  the  vendor  will  be  made  to  the  heir ;  it  regards  the  unpaid 
purchase  price  as  a  part  of  the  vendor's  personalty,  and  the  money,  when  paid, 
will  go  to  the  vendor's  executor  in  case  the  vendor  has  died. 

Since  equity  regards  the  land  as  that  of  the  vendee,  he  must  bear  the  loss  if 
buildings  burn,  and  cannot  escape  paying  the  purchase  price  on  that  account; 
but  at  law  the  risk  will  follow  the  legal  title,  and  the  loss  from  destruction  of 
buildings  will  fall  on  the  vendor. 

171.  Conveyances.  Conveyances  of  interests  in  lands  other 
than  leases  are  by  deed.  Of  these  there  are  two  kinds :  quit- 
claim deeds  and  warranty  deeds. 

A  quitclaim  deed  conveys  whatever  title  the  grantor  may  have, 
and  throws  upon  the  grantee  the  risk  as  to  whether  there  is  a 
good  or  a  bad  title  or  no  title  at  all. 

A  warranty  deed  conveys  the  title  of  tlie  grantor,  and  he  cove- 
nants, or  warrants,  ia)  that  the  grantor  is  seised  of  the  lands  and 
has  the  right  to  convey  them  ;  {b)  that  they  are  unencumbered  (un- 
less otherwise  stated) ;  (c)  that  the  grantee  shall  have  quiet  enjoy- 
ment, that  is,  shall  not  be  evicted  by  any  superior  title  ;  {d)  that 
the  grantor  will  warrant  and  defend  him  in  this ;  {e)  that  the 
grantor  will  execute  any  further  instrument  necessary  to  perfect 
the  grantee's  title. 

Many  states  provide  by  statute  for  a  short  form  of  deed  which 
shall  be  deemed  to  carry  with  it  all  these  warranties. 

A  deed  must  be  signed  by  the  grantor  and,  unless  otherwise 
provided  by  statute,  must  be  sealed ;  in  some  states  it  must  also 
be  witnessed.  In  order  to  be  recorded  it  must  be  acknowledged 
before  a  notary  or  other  authorized  official.  Recording  is  neces- 
sary in  order  to  prevent  a  subsequent  sale  to  an  innocent  pur- 
chaser.   The  deed  must  be  delivered  to  the  grantee  ;  usually  this 


§  172]  TRANSFERS  277 

is  a  manual  delivery,  but  less  than  this  has  been  held  to  be  suffi- 
cient where  the  intention  was  clear.  A  delivery  in  escrow  is  a 
delivery  to  a  third  person  upon  condition  that  the  deed  shall  not 
take  effect  until  some  condition  is  fulfilled.  An  agent  duly  author- 
ized by  power  of  attorney  may  execute  and  deliver  a  deed  for  his 
principal  (see  sect.  119). 

If  a  deed  is  made  by  a  married  man,  it  is  usual  to  have  his 
wife  join  in  it ;  otherwise,  should  she  sur\ive  him,  she  could  claim 
her  right  of  dower  in  the  property  conveyed.  If  a  deed  is  made 
by  a  married  woman,  her  husband  should  join  in  it  in  order  to  bar 
his  possible  estate  by  the  curtesy.  But  in  many  states  by  statute 
the  wife  is  given  power  to  destroy  the  husband's  curtesy  by  her 
conveyance,  and  no  joinder  by  the  husband  is  necessary  to  free 
the  property  from  the  incident  of  curtesy.  If  property  is  owned 
jointly,  the  owners  may  convey  by  joining  in  one  deed. 

A  deed  consists  of  the  following  parts  :  (a)  the  premises,  con- 
taining the  names  of  the  parties,  sometimes  the  date  (though  this 
may  be  at  the  end),  a  statement  of  the  consideration  and  of  its 
payment,  the  words  of  conveyance,  and  the  description  of  the 
land  ;  (d)  the  habendum,  or  statement  of  the  estate  granted,  be- 
ginning often,  but  not  always,  with  the  words  "To  have  and  to 
hold  "  ;  (c)  any  reservation  that  is  to  be  made  ;  (d)  the  covenants, 
or  warranties ;  (e)  the  conclusion,  containing  the  stateinent  that 
the  grantor  has  signed  and  sealed,  together  with  his  signature 
and  seal  and  the  signatures  of  the  witnesses,  if  any  ;  (/)  the 
acknowledgment  before  a  notary  of  the  due  execution  of  the 
instrument. 

172.  Wills.  Property  may  be  transferred  by  will.  In  order  that 
a  will  shall  be  valid  it  must  be  signed  (in  some  states  subscribed) 
by  the  testator,  and  his  signature  attested  by  two  or  more  witnesses. 
In  some  states  the  testator  must  actually  sign  in  the  presence  of 
the  witnesses,  and  they  in  his  presence  and  in  the  presence  of 
each  other.  In  many  states  one  who  is  named  as  a  beneficiary 
in  the  will  and  also  signs  it  as  a  witness  cannot  take  the  devise 
or  bequest ;  hence  it  is  important  that  the  witnesses  should  not 
be  interested  in  the  will. 

As  a  will  does  not  take  effect  until  the  flcath  of  a  testator, 
a  devise  or  bequest  lapses  if  the  donee  dies  before  the  testat(jr, 


Warranty  Deed 

C|)ifi  ^nlicnturr. 

Made  the fAT^.^ day  of  — — .^Pr^.V— —  in  the  year  One  thousand 

nino  hundred  and..?.^.^.*:?.?.".— — — r— -  ** 

'SctlUCCn Charles  Lewis,    unmarried,    of   the   City  of  Syracuse,    County 

of  Onondaga,    and  State  of  New  York.  — — - — 

uf  the  first  part,  and 


.Walter   Cooke,  of  No.    310  Mill  St.    in   said   City  of  Syracuse, 


of  the  second  part, 

^ttnr6CCtI)»  That  the  szid party  of  the  first  part,  in  consideration  of  the  sum  of 
six    thousand   dollars 

($  ^.•PPP;.9.9.-7-r-),  lawful  money  of  the  United  States,  paid  by  the/ar/y  of  the 
second  part,  does  hereby  grant  and  release  unto  the  sa.\dparty  of  the  second 
part, .^A ^. heirs  and  assigns  forever, 

ail  tbat  Crart  or  parcel  of  lanU,  situate  in  the ^y^y. of 

■ ^y.r^°Hs.^ County  of P"?"";^^.?.^ and  State 

of  New  York  situate,  lying  and  being  in  the  tenth  ward  of ^ 
Syracuse,  and  known  as  lot  numbered  three  hundred  and  thirty  ( 330)_  on  a _ 
"Map  of  Land  in  the  city  of  Syracuse  lying  between  Tenth  and  T^ 
Streets"  and  filed  in  the  County  Clerk|s  office  of  Onondaga  County 

the  tenth  day  of  June,  1899.  bounded  and  described  as  foll^ 

Commencing  on  the  northwesterly  corner  of  Fire t  Avenue  a^ 

Street  and  running  thence  northerly  along  the  westerly  side  of  First 

Avenue  forty-three  (43)  feet ...thence  westerly  and  pa 

teenth  Street  eighty  (80)  feet,  thence  Boutherly  and  paral^ 

Avenue  forty-three  (43)  feet  to  the  northerly  side  of  Thirteenth  Street, 

and  thence  easterly  along  the  northerly  side  of  Thirtee 

(80)  feet  to  the  place  of  beginning. 

QToffCtbcr  with  the  appurtenances,  and  all  the  estate  and  rights  of  the  S3\6. party 
of  the  first  part  in  and  to  said  premises.    QTo  |)at)C  anU  tO  |)OlB  the  above  granted 

premises  unto  the  sdiidparty   of  the  second  part, .^A?. heirs  and 

assigns  forever. 

2Ln1I  the  said  Charles  Lewis,    party  of  the   first  part ^ 

do  es    covenant  with  the  snid part y   of  the  second  part  as  follows: 

278 


Sfit^t.  —  That  the  fari  y   of  the  first  part ^.? seised  of  the  said 

premises  in  fee  simple,  and  /ui  s    good  right  to  convey  the  same. 

;§)CCOnli.  —  That  the  party  of  the  second  part  shall  quietly  enjoy  the  said 
premises. 

(Cbirb.  —  That  the  said  premises  are  free  from  incumbrances. 

iFourtf).  —  That  the  pariy  of  the  first  part  will  execute  or  procure  any  further 
necessary  assurance  of  the  title  of  said  premises. 

jr|fj{)^ That  the  said..''^^'"^®^  Lewis,    party  of   the   first  p'"'*  . 

will  forever  warrant  the  title  to  said  premises. 

^Tn  WitnC^^  Wf^CVCOf,   The  said /<?/-/- y    of  the  first  part  /tag    here- 
unto set.-— r)}}?..—77r Jiajid     and  sea/     the  day  and  year  first  above  written. 
Jn  presence  of 


^fbcuitt'a^  Lbwi'^ 


;§itatc  of  J^ettj  gorfi, 

County  of 9".°.".<^^ga 

City         of       Syracuse 


On  this- 


TArs.t.-T— -.day  of— —.April.. 


•.in  the  year  One  thousand 


nine  hundred  and.. ?. i^^.^^" before  me,  the  subscriber,  personally 

appeared. P.^.^.r.^?.?.  .?;?.?.i.  ^ ♦ 

to  me  personally  known  to  be  the  same  person     described  in  and  who  executed 

the  foregoing  instrument,  and     ke acknowledged  to  me  that 

he     executed  the  same. 

Notary  Public  for  Onondaga  County,  New  York. 


r  NOTARY  •  S  "l 
I       SEAL       J 


[A  quitclaim  deed  would  read  like  the  above  except  that  it  would  s:iy  "does  hereby 
remise,  release  and  forever  quitclaim  unto  the  said  party,"  and  would  omit  the  warranties. 
A  deed  may  be  a  gift,  that  is,  the  grantee  may  pay  nothing.  In  such  case  it  is  usual  to 
say  "  in  consideration  of  one  dollar  t<j  me  in  hand  paid,  and  other  good  and  siifTicicnt 
consideration."] 


^n 


28o  RKAL   I'ROl'KR'I'V  [Cii.  XIV 

unless,  as  in  some  states,  the  statute  provides  who  shall  take  in 
that  event.  In  case  a  devise  of  land  lapses  by  the  death  of  the 
devisee,  it  will  go  to  the  testator's  heirs,  unless  there  be  a  residuary 

devise  ("  all   the  rest  of   my  property  to ")  ;    in    this  case, 

in  most  states  it  will  pass  to  the  person  named  in  the  residuary 
clause,  but  in  some  it  will  even  then  go  to  the  heir. 

At  common  law  the  marriage  of  a  woman  after  making  her 
will  revokes  the  will ;  but  this  has  to  some  extent  been  changed 
by  statutes.  The  marriage  of  a  man  after  he  makes  his  will,  fol- 
lowed by  the  birth  of  a  child,  revokes  his  will ;  but  this  also  has 
in  some  states  been  modified  or  regulated  by  statute.  If  a  child 
is  born  after  the  will  of  a  married  man  or  woman  is  made,  and 
there  is  no  provision  in  the  will  for  such  after-born  child,  most 
states  provide  that  the  child  shall  take  what  would  have  descended 
to  him  had  the  parent  died  without  a  will. 

In  most  states  a  person  may  not  make  a  valid  will  of  real  prop- 
erty until  he  is  twenty-one.  This  is  also  frequently  true  of  a 
will  of  personalty,  but  some  states  permit  a  will  of  personalty  at 
eighteen.  A  person  of  unsound  mind  cannot  make  a  valid  will. 
The  law  of  wills  is  so  much  a  matter  of  statute  that  local  legis- 
lation must  be  consulted,  in  order  that  the  necessary  formalities 
may  be  observed  and  the  intention  of  the  testator  consummated. 
It  is  not  prudent  for  a  person  to  make  his  will  without  good 
legal  advice. 

173.  Descent  to  heirs.  If  an  owner  of  real  property  dies  with- 
out a  will,  the  real  estate  (that  is,  any  estate  of  inheritance)  goes 
to  the  persons  designated  by  law  as  his  heirs,  subject  to  the  estate 
of  dower  or  curtesy  in  a  surviving  wife  or  husband.  The  statutes 
provide  who  shall  be  deemed  heirs.  They  are  usually  the  follow- 
ing :  first,  children  and  the  children  of  a  deceased  child,  the  latter 
taking  among  them  the  share  which  their  parent  would  have 
taken  had  he  lived*  second,  if  there  be  no  lineal  descendant, 
the  father ;  third,  it  there  be  none  of  the  above,  the  mother, 
brothers,  and  sisters,  and  the  descendants  of  deceased  brothers 
and  sisters  ;  fourth,  failing  these,  collateral  relatives,  beginning 
with  the  uncles  and  aunts  and  their  descendants.  There  are 
many  variations  in  the  statutes,  and  only  a  general  notion  of 
them  can  be  given  here. 


Will 

/,  James  Brown,  of  the  City  of  Ithaca  in  the  County  of  Tompkins  and  State 
of  New  York,  being  of  sound  mind  and  memory,  do  make,  publish  and  declare 
this  my  last  Will  and  Testament,  in  manner  following,  that  is  to  say: 

First.  —  /  direct  that  all  my  just  debts  and  funeral  expenses  be  paid. 

Second.  —  /  give  and  bequeath  to  my  son,  William  Brown,  five  thousand 
dollars  {^^,OOO.o6). 

Third.  —  /  give  and  bequeath  to  the  Home  Orphan  Asylum  of  New  York 
city  three  thousand  dollars  (^$J,OOO.od). 

Fourth.  —  I  give,  devise  and  bequeath  to  my  daughter,  Mary  Brown,  my 
farm  in  the  town  of  Dryden,  county  of  Tompkins,  state  of  New  York,  known 
as  "  Oakdale,"  for  and  during  the  term  of  her  natural  life,  and  after  her 
death  to  her  lawful  issue  her  surviving. 

Fijth.  —  /  give,  devise  and  bequeath  to  my  wife,  Elizabeth  Brown,  all 
the  rest,  residue  and  remainder  of  my  estate,  both  real  and  personal,  in  lieu  of 
her  right  of  dower. 

Lastly,  I  hereby  appoint  Henry  Wilson  executor  of  this  my  last  Will  and 
Testament :  hereby  revoking  all  former  wills  by  me  made. 

In  Witness  Whereof,  I  have  hereunto  subscribed  my  name  the  tenth  day  of 
June,  in  the  year  of  our  Lord  one  thousand  nine  hundred  and  sixteen. 

;"' 

We  whose  names  are  hereto  subscribed  do  certify  that  on  the  loth  day  of 
June,  1(^1 6,  James  Brown,  the  testator,  subscribed  his  name  to  this  instrument 
in  our  presence  and  in  the  presence  of  each  of  us,  and  at  the  same  time,  in  our 
presence  and  hearing,  declared  the  same  to  be  his  last  Will  and  Testament, 
and  requested  us,  and  each  of  us,  to  sign  our  names  thereto  as  witnesses  to  the 
execution  thereof,  which  we  hereby  do  in  the  presence  of  the  testator  and  of 
each  other,  on  the  said  date,  and  write  opposite  our  names  our  respective  places 
of  residence. 

^e^yiae.  Jbciw^cU^cyyv  residing  at  Jtlxa^^a,^  <yf&w-  Ijc^xk,. 

<SAaAZ&^  SciAiKHAycU/  residing  at  dftkaea,,  c4e/iv-  IfcyJc. 


281 


282  REAL   I'ROPKRTY  [(^'i.  XIV 

If  an  owner  of  personal  property,  including  leasehold  estates 
in  land,  dies  without  a  will,  the  proi)erty  goes  to  his  adminis- 
trator to  pa\'  debts,  anil  is  [hew  dislrihuted  among  the  persons 
designated  by  statute  as  next  of  kin.  These  statutes  are  much 
like  those  detining  heirs,  except  that  a  widow  is  usually  given  a 
considerable  portion  of  the  personalty  absolutely,  say  one  third 
if  there  be  children,  and  one  half,  or  often  more,  if  there  be  no 
children  or  grandchildren. 

174.  Adverse  possession.  One  may  lose  and  another  gain  title 
to  real  property  by  adverse  possession.  This  is  an  open,  actual, 
exclusive,  and  continuous  possession  hostile  to  the  true  owner  for 
a  period  of  time,  usually  twenty  years,  which  by  statute  bars  the 
right  of  the  true  owner  to  bring  an  action  to  recover  the  posses- 
sion. Residing  on  the  land,  cultivating  it,  or  fencing  it  may  be 
enough  to  show  adverse  possession.  A  tenant  or  other  person 
holding  under  the  owner  could  not  get  adverse  possession. 

V.    Mortgages  and  Liens 

175.  Mortgages  of  real  property.  A  mortgage  is  in  form  a 
conveyance  of  the  title  to  lands,  with  a  defeasance  clause  stating 
that  in  case  the  mortgagor  pays  to  the  mortgagee  a  certain  sum 
to  secure  which  the  mortgage  is  given,  the  conveyance  shall  be 
null  and  of  no  effect.  It  is  a  form  of  giving  security  for  a  debt 
by  creating  a  lien  on  land,  and  is  executed,  acknowledged,  and 
recorded  like  a  deed.  If  it  is  not  recorded,  a  subsequent  mort- 
gage, taken  without  notice  of  the  first  and  duly  recorded,  would 
take  precedence,  or  one  purchasing  the  land  without  knowledge 
of  the  mortgage  would  get  the  land  free  from  the  lien. 

The  debt  to  secure  which  the  mortgage  is  given  is  usually  evi- 
denced by  a  note  or  bond.  The  debt  and  the  mortgage  which 
secures  it  may  be  assigned.  The  assignment  is  formally  executed 
and  also  recorded.   * 

When  the  mortgage  is  paid,  a  formal  discharge  or  satisfaction  is 
executed  by  the  mortgagee  or  his  assignee,  and  is  also  recorded. 

If  the  mortgage  is  not  paid  when  due,  the  mortgagee  or  assignee 
may  foreclose  it  and  sell  the  land  to  pay  the  debt,  interest,  and 
costs,   any   residue    above    this    going    to    the    mortgagor.     The. 


§176]  MORTGAGES  AND  LIENS  283 

mortgage  may  give  a  power  of  sale  without  requiring  the  mort- 
gagee to  resort  to  a  judicial  proceeding  for  foreclosure.  If  the 
land  does  not  sell  for  enough  to  pay  the  debt,  a  judgment  may  be 
had  against  the  mortgagor  for  the  deficiency  in  case  he  has  also 
given  a  note  or  bond  or  has  undertaken  a  personal  liability. 

176.  Liens  on  real  property.  In  some  states  an  unpaid  vendor 
of  land  has  a  lien  on  the  land  for  the  unpaid  purchase  money, 
and  a  contract  vendee  of  land  who  has  paid  part  of  the  purchase 
price  has  a  lien  on  the  land  to  the  extent  of  his  payment. 

In  many  states  one  who  makes  improvements  on  lands,  believ- 
ing them  to  be  his,  and  who  is  afterwards  ejected  by  one  having 
a  better  title,  is  allowed  a  lien  on  the  lands  for  the  betterments. 

Statutes  often  provide  for  a  lien  in  favor  of  unpaid  mechanics 
who  have  performed  labor  upon  buildings,  or  in  favor  of  those 
who  have  furnished  material  for  them. 

A  judgment  against  a  person,  rendered  in  a  federal  court,  is  a 
lien  on  all  the  lands  of  the  judgment  debtor  situated  in  the  state 
in  which  it  is  rendered.  A  judgment  in  a  state  court  is  a  lien  on 
the  lands  of  the  judgment  debtor  situated  in  any  county  of  that 
state  in  which  such  judgment  is  docketed. 

In  most  states  taxes  on  a  particular  piece  of  land  constitute  a 
lien  on  the  land  until  paid. 

Before  purchasing  land  one  should  have  all  the  records  care- 
fully searched  in  order  to  ascertain  whether  the  vendor's  title  is 
good  and  whether  any  liens  are  recorded  against  the  property. 
An  abstract  of  title  is  usually  furnished  by  the  vendor,  showing  all 
instruments  of  record  affecting  the  title  ;  this  should  be  examined 
by  the  vendee's  attorney,  and  his  certificate  that  it  discloses  a 
good  title  should  be  attached. 

The  so-called  Torrens  system  of  registering  titles  to  land  is  in 
force  in  thirteen  states.^  Under  this  system  one  desiring  to  have 
his  title  registered  applies  to  a  designated  court.  The  title  is 
examined  by  an  official  examiner  of  titles.  All  persons  claiming 
to  have  any  interest  in  the  ])roi)erty  arc  given  notice  of  the  pro- 
ceeding.   The  court  gives  a  judgment  in  which  it  adjudges  who 

'  California,  Colorado,  Illinois,  Massachusetts,  Minnesota,  Mississippi.  Nebraska, 
New  ^'ork,  North  Carolina,  Ohio,  Oregon,  Virginia,  and  Washington,  and  also 
Hawaii  and  the  rhili|)pinc  Islands. 


Mortgage 


Cijis  fntirututt, 


Made  the ^j.f.\}} day  of 9P.P°??.^r. in  the  year  One  thousand 

nine  hundred  and^o"*:.^?.?." 

of   the   City   of  Rochester,    County  of  Monroe,    and  State  of  New  York, 

/,//-/ y    of  the  first  part,  and ^.6.9r.g.?..»3.^.9h 

°r...'^^?...^.^°??...PA^'^.?.-. /cri  y   of  the  second  part. 

W\lCVCafi,    the  said— — — .T'^.°.'".^?...?.°'^e!-a 


..^.?.. justly   indebted   to   the 


said/(7;-/y    of  the  second  part  in  the  sum  of 9 A?^ . ■'^)?°V.?.^.n!^. I )ollars 

(S.^.r 99.9. •. .99. .rrTTT.),  lawful  money  of  the   United   States,  secured  to  be  paid  by 

^?.?... certain  bond  or  obligation,  bearing  even  date  herewith,  conditioned  for 

the  payment  of  the  said  sum  of..?.^.x..t.h°y3.a-.".d Dollars 

/«  6,000.00  .^— )  on   the   first_day_of  November .nineteen  hundred  and 
sixteen,   and  the  interest  thereon,   to  be  computed   from  this  date  at    the 
rate  of  five  per  centum  per  annum,    and  to  be  paid  semiannually  on  the 
fifth  days  of  April  and  October   in  each  and  every  year  until  the  whole 
of  said  principal   sum  be   fully  paid,    with   the  privilege   to   the   party  of 
the   first  part,   his   executor,    administrator  or   assigns,    on  any  day  when_ 
interest   is   payable,    to    pay  off  the  principal   of  said  mortgage   in   sums 
of   one   thousand  dollars   or  more.  ■ 

JItJoto  tl)ifi  ^nticnturc  WitnC&tiCt)^,  That  the  said  />nr(  y  of  the  first  part, 
for  the  better  securing  the  payment  of  the  said  sum  of  money  mentioned  in  the 
condition  of  the  said  bond  or  obligation,  with  interest  thereon,  and  also  for  and 
in  consideration  of  one  dollar  paid  by  the  said  fnr^  y  of  the  second  part,  the 
receipt  whereof  is  hereby  acknowledged,  do  es  hereby  grant  and  release  unto 
the />ar/ y  of  the  second  part,  and  to... ^.i..^.... heirs  (or  successors)  and  assigns 
forever, 

Sill  tl)at  STract  or  Parcel  of  lanB,  situate  in  the 9.\^y. of 

: ?.°.9.''^e3ter County  of MQ.P.T.qP. and  State 

of  New  York  iJounded  and  described  as  follows ,  viz  .:Beginnirig  at  a 
point  in  the  northerly  line  of  Forest  Avenue  three  hundred  and  t^^ 
three  (323)  feet  easterly  from  the  easterly  line  of  North  Street;^^^r^^ 
ning  thence  easterly  along  said  line  of  Forest  Avenue  three  hu^^ 

seventy  (370)  feet;  thence  northerly  two  hundred  and  f if t^^^ 

feet;  thence  westerly  and  parallel  with  Forest  Avenue  three^^h^^ 

seventy  (370)  feet;  thence  southerly  two  hundred  and  f if ty-t^^ 

feet  to  the  place  of  beginning. 

Cogctbcr  with  the  appurtenances,  and  all  the  estate  and  rights  of  the 
part  y  of  the  first  part  in  and  to  said  premises. 

284 


STo  l^atoC  antl  to  U0l5  the  above  granted  premises  unto  the  said/(7r/y  of 
the  second  part,  .'^A?.. heirs  and  assigns  forever. 

ProUiUeU  9lltDap6,  That  if  the  said  party  of  the  first  part,.. ^i.^.. heirs, 
e.xecutors  or  administrators,  shall  pay  unto  the  said  part  y  of  the  second  part, 
.'^A?..  executors,  administrators  or  assigns,  the  said  sum  of  money  mentioned 
in  the  condition  of  the  said  bond  or  obligation,  and  the  interest  thereon,  at 
the  time  and  in  the  manner  mentioned  in  the  said  condition,  then  these  presents, 
and  the  estate  hereby  granted,  shall  cease,  determine  and  be  void. 

xinll  the  said/<7r/y  of  the  first  part  coz'enant  3  with  the  party  of  the  sec- 
ond part  as  follows  : 

That  the  part  y  of  the  first  part  will  pay  the  indebtedness  as  hereinbefore 
provided,  and  if  default  be  made  in  the  payment  of  any  part  thereof,  the  part  y 
of  the  second  part  shall  have  power  to  sell  the  premises  herein  described,  accord- 
ing to  law. 

5Fn  WitWt^^  9^f)CrC0f,  The  said  part  y  of  the  first  part  /ui  3  here- 
unto  set. ?!^?.. hand     and  seal     the  day  and  year  first  above  written. 


3n  prcsicncc  of 


.ff/l^9.?M/^....S.Q^i!^l'^. /ZX 


^tatc  of  J?ictD  gorft. 

County  of M.on.r9.e 

*'^*y        of       Rochester 


On   this' 


-f.i.f>l^.-T— — day  of ——.October  ____  in    (hg    y^^^   One 

thousand  nine  hundred  and.f.o.^r^.^^H before  me,  the  subscriber, 

personally  appeared .'^■^°.°'.^.?. .?'°.*.9.'^^. to  me  personally 

known  to  be  the  same  person     described  in   and  who    executed  the  foregoing 

instrument,  and     he acknowledged  to  me  that     /le     executed 

the  same. 


r  IIOTARY'S  ^ 
I       SEAL       J 


'e'f'ti.-y.    j^.      '^'Ce/i^e^ytiUi^ 


Notary  Public  for  Uonroe  County.  New  York. 


[If  Thomas  Powers  were  a  married  mnn,  it  would  \*t  unsafe  for  Hatch  to  take  tlic  mort- 
gage unless  the  wife  of  Powers  joined  in  it,  l:)ecause  a  foreclosure  of  Powers'  interest  would 
not  affect  the  rrght  of  the  wifi?  tn  dowur  in  c.ise  she  survived  her  husband.] 


z85 


Assignment  of  MoKT(iAoii 

€\)i^  '3'nj5'tnini  cut,    Made  this  — f  if  tH^^  day  of  ^^  April.  __i(j  ^g^ 
^rttUrCR  '^^?.^.**..'?.*.^?.^.!..°^...V^?...9^.':y. .9T..?.?.9l}^^^^'"'    county  of  Monroe,    and 

State  of  New  York, of  ji,^.  fl^st  part,  and 

Albert  Jones,  of  the  City  of  Ithaca,  Coun  and  State  of 

•^^^  ^°''^' of  the  second  part, 

Ti'ltnC^^Cty,     That  the  /><ir/y   of   the  first  part,  for  a  good  and  valuable 

consideration  to ^.^!? in  hand  paid  by  the  said  party    of   the  second 

part,  ha  s    sold,   assigned,   transferred   and   conveyed,    and    do  es    herel)y    sell, 
assign,  transfer  and  convey  to  the  part  y  of  the  second  part  a  certain  mortgage 

bearing    date     the ^^.^^^ day    of 9?.^.°l^.?.r.'. 19  14,     made    by 

Thomas   Powers (q  George  Hatch,    eaid  party  of  the 

.r?.r.?.*..P.*.r.Vv7— -T— — TTto  secure  the  payment  of  the  sum  oi..^}.^. . ^^.9.'^.^?:"4 ■ 

Dollars  ($.?.;. 9 P?.:. 9.9 .-tttt),  and  interest  thereon  from  the  date  thereof, 


•.recorded  in  the  Clerk's  office  of M.°P.r.9.^.' 


County,  State  of  New  York,  in  Liber.T7r'..'*.^.?..TTT.of  Mortgages,  at  pagerTTr.?^^f^.'.TrTr. 
on  the-— — .fifth.-T— :day  of  r— T-..0.9.t.?.^.9.':.«..-rTT-TT  19  14.  at -t-t-.^wo.tttttt. o'clock 
P.  M.,  together  with  the  bond  accompanying  said  mortgage  and  therein  referred 
to,  and  all  sums  of  money  due  and  to  grow  due  thereon.     And  the/(/r/y  of  the 

first  part  hereby  covenant  a  that  there  is . 7}?.?. due 

on  said  bond  and  mortgage  the  sum  of..fo.ur..t.hou8and  dollars    ($4,000.00) . 

3^U  WiiWt^^  ^l)CrCOf,   The  said  party  of  the  first  part  has  here- 
unto set .^.i?. Aatid      and  seal      the  day  and  year  first  above  written. 


.c^rr^M^.....//k^.#^. 


.[L.S.] 


&tatt  of  l^etiJ  gorft, 

County  of "9".T.9e. 

City         fjf       Rochester 

On    this  r^.r.^.^ day   of AP.!".^.^ in   the    year  One   thousand 

nine  hundred  and  ..^.V^^?.?.? before  me,  the  subscriber,  personally 

appeared .9^9 Tf .9. .^^.^9^ to  me  personally  known  to 

be  the  same  person      described  in  and  who  executed  the  foregoing  instrument, 
and    he acknowledged  to  me  that    he     executed  the  same. 


r  NOTARY '  s  ^  J^tJ-A-n-      S.      ^'< 

\       SEAL   / 


'^^^d^ 


Notary  Public  for  Monroe  County.  New  York^ 
:S6 


Discharge  of  Mortgage 


state  of  New  York 
County  of  Tompkins 
City  of  Ithaca 


I,  Albert  Jones,  of  the  City  of  It^^           of  Tompkins,  and  State 
of  New  York ^^_^^_^.^^__^^__ 

SDO  l^CrCbp  CCrtifp,   That  a  certain  Indenture  of  Mortgage,  bearing  date 

the .^.ifth day  o£ 9.9l°t'.s.'- in  the  year  One  thousand 

nine  hundred  andJoMT^f^n made  and  executed  by. T^o."^-.^.. Powers,    of 

the   first  part,    to  George  Hatch,    of  the   second  part,  


and  recorded  in  the  office  of  the  Clerk  of  the  County 

of HQ.'i'.r."?.. State  of  New  York,   in   Liber— -—.456  ___ of 

Mortgages,    page.TTTTT.l^.l-.-TTTT.on    the.— — .r.i.^.th.r— day    of P.^.^P^.?.':.-. 

19  .1.4....rTr-.at..>.w.9 .o'clock .?.^.^I.,.*.^.';P^...^^^.'i..!"°.^*■.?.*se  was   duly  assigned 

to  me  by   the   said   George  Hatch,    the  mortgag^       above  named,    by  assignment 
dated   the  fifth   day  of  April.^^1^  in   the   Clerk's   office 

of  Monroe  County,    State   of  New  Y  in  Liber  460  of  Mortgages,    at  page 


210.   on   the  fifth  day  of  Apr n,    1916.    at    four  o'clock,    P.M. 


bond  ■ 


is,  together  with  the 

•.secured  thereby,  fully  paid,  satisfied  and  discharged. 


Dated  the ^.fJ}^^ day  of 

January  iq  17 


. Qih(i^.'.  f.(^^^.M'. 


;$itntc  of  BettJ  gorh, 

County  of .7.9???.^.^?}?. 

City        of       }.^y>^9.^... 


On  this .t:9.".th day  of  — — ..J.*.nH?:!'.y..— —  in  the  year  One  thousand 

nine  hundred  and.  ^.®.^?.".^®®"— — — — -before  me,  the  subscriber,  personally 

appeared r — — — \ A^^'^r*,  Jones  ___ — _ —  to  me  personally  known  to  be 

the   same  person       described  in   and   who  executed   the    foregoing    instrument, 
and     he acknowledged  to  me  that     he     executed  the  same. 


r  NOTARY'S  I 
I       SEAL       J 


(ptuie^^.     c/<t«^ 


Notary  Public  for  TompklnB  County .New  York. 
287 


2SS  REAL  PROPERTY  [Cn.  xiv 

arc  the  owners  of  the  property  and  the  nature  of  the  interest  of 
each.  An  otVicial  registrar  of  titles  then  issues  a  certificate  of 
the  vahdity  of  the  title  as  adjudged  by  the  court.  All  subse- 
quent transfers  of  the  property  are  noted  on  this  certificate.  The 
title  as  thus  registered  is  perfect,  and  subsequent  dealers  with  the 
property  need  not  search  back  of  such  registration. 

VI.    Landlord  and  Tenant 

177.  The  lease  and  its  covenants.  Estates  for  years  have  already 
been  explained  (see  sect.  i6o  ante).  The  relation  of  landlord  and 
tenant,  or  lessor  and  lessee,  is  created  by  a  lease,  which  conveys  an 
estate  for  years  to  the  tenant  and  leaves  a  reversion  in  the  land- 
lord. By  the  Statute  of  Frauds  all  leases  for  more  than  a  speci- 
fied number  of  years  must  be  in  writing ;  in  many  states  the 
specification  is  three  years,  but  in  some  it  is  one  year,  A  lease 
need  not,  however,  be  under  seal. 

The  estate  in  the  lessee  is  not  created  until  he  enters  under 
the  lease  (that  is,  he  could  not  bring  an  action  as  owner  of  an 
estate),  although  he  has,  of  course,  his  contract  right  against  the 
lessor  for  a  refusal  to  allow  him  to  take  possession,  and  is  him- 
self liable  as  for  rent  if  he  refuses  to  enter.  When  he  enters  he 
has  thereafter  the  exclusive  right  to  possession  during  the  life 
of  the  lease,  and  may  maintain  an  action  against  anyone  who  in- 
jures the  property.  If  the  wrongdoer  also  injures  the  reversion, 
the  landlord  may  have  his  action  as  well. 

A  lease  is  in  form  a  conveyance  of  lands  for  a  term  of  years 
or  at  will,  in  consideration  of  a  return  of  rent  or  other  recom- 
pense. The  person  conveying  is  called  the  lessor,  and  the  person 
receiving  the  conveyance  is  called  the  lessee.  The  words  of 
conveyance  are  usually  "grant,"  "demise,"  "lease,"  "let,"  but 
any  words  expressive  of  an  intention  to  transfer  possession  are 
sufficient. 

Any  express  covenant  upon  which  the  parties  agree  may  be 
inserted  in  a  lease.  Those  almost  always  present  are  the  lessee's 
covenant  to  pay  rent,  a  covenant  that  one  party  or  the  other  will 
pay  taxes  and  assessments,  and  the  lessee's  covenant  to  surrender 
the  premises  in  good  condition  at  the  end  of  the  term.    Other 


■of 


Lease 

^  ILease 

Made   and   executed    ^CttoCCn   J.9fin..?.^.9^3.rda 

the  r-T— -.Ci.ty.^—  of Bat,avia, y^^  y^^j.^  ^f  ^j^^ 

first  part,  and ^^.".':y..J.^.c>^3.°" of    the P.^ty. 

of Batayia. jsje^   York,  of   the   second   part, 

this f.^.T.st day  of April ^^  the  year  One 

thousand  nine  hundred  and..CAf.?'.?.^P..- 

^n  ^OnSluCTaltOn  of  the  rents  and  covenants  hereinafter  expressed,  the 
said  party  of  the  first  part  has  ©tmifiClJ  ailll  LcafifU,  and  does  hereby  demise 

and  lease  to  the  said  party  of    the  second  part 

the  following  premises,  viz. : 

a  dwelling  house   situated  on   the   east   side   of  Park  Street,    between  Allen 

Street  and  North  Street,    and  known  as   124  Park  Street.    Batavia,    New 

T°r^! with  the  privileges 

and  appurtenances,  for  and  during  the  term  of °P.?.  .yP.f'.r from 

ther— -..f.i.r.9.t.-T-r-.day  of April. j^  ^5^  ^s\{\<::'a  term   will 

end..9.'?..^.^.®..1^*?Ar.*.y/.f.^.r?.!^...4.^y_?.f...M.^r.?.^.\..l?A.'^.-... And  the  said 

part  y     of  the  second  part  cozr/tant  a    that    Ae   will  pay  to  the  party  of  the  first 

part  for  the  use  of  said  premises,  the ?°.'?.^^?-y rent  of 

^°.r.ty Dollars  ($fO.-.99..-— ),  to  be  paid.P°.r.t.h.ly..in... 

advance.  ^^ 

3[nll  ^JrO^itlCll,  said  party    of  the  second  part   shall  fail  to  pay  said  rent,  or 

any  part  thereof,  when  it  becomes  due 

it  is  agreed  that  said  party  of  the  first  part  may  sue  for  the  same,  or  reenter  said 
premises,  or  resort  to  any  legal  remedy. 

The  part  y    of  the f.}.'!^^. part  agree  a    to   pay   all  r- — 

taxes  to  be  assessed  on  said  premises  during  said  term..?.^9?.P.^...*:!^?..**^.®.r 

tax.  

The  party  of  the  second  part  covenant  b  that  at  the  expiration  of  said 
term  he  will  surrender  up  said  premises  to  the  party  of  the  first  part  in  as 
good  condition  as  now,  necessary  wear  and  damage  by  the  elements  excepted. 

xi'irilCSS  the  hands  and  seals  of  the  said  parties  the  day  and  year  first  above 
written. 

.'S9 


290  REAL   PROPERTY  [Cii.  XIV 

express  covenants  may  be  that  the  lessor  will  repair  buildings  or 
renew  the  lease,  or  that  the  lessee  will  repair,  or  not  assign  or 
sublet,  and  the  like.  Words  not  plainly  expressive  of  a  covenant 
may  be  construed  to  indicate  an  intention  to  make  one. 

The  implied  covenants  are  that  the  lessor  has  the  right  to 
make  the  lease  and  that  the  lessee  shall  have  quiet  enjoyment  of 
the  premises.  These  covenants  mean  that  the  lessee  shall  not 
be  disturbed  by  the  lessor  or  anyone  claiming  superior  tide  ;  the 
lessor  does  not  warrant  the  lessee  against  the  acts  of  trespassers 
or  other  wrongdoers. 

178.  Defects,  repairs,  and  waste.  The  law  is  not  very  favor- 
able to  the  lessee  as  regards  defects,  repairs,  or  the  cutting  of 
timber  or  the  working  of  mines.  He  has  but  a  temporary  inter- 
est and  must  use  the  property  so  as  not  to  decrease  the  value  of 
the  reversion. 

1.  Defects.  Except  so  far  as  there  are  express  covenants  in 
the  lease  to  the  contrary,  the  lessee  takes  the  premises  in  the 
condition  in  which  they  are  when  the  lease  is  executed.  There 
is  no  implied  covenant  that  they  are  in  good  condition  or  fit  for 
occupation. 

There  arc  two  exceptions  to  this  rule,  {a)  The  lessor  is  liable  if,  known  to 
him,  the  premises  contain  some  concealed  and  dangerous  defect  which  the 
tenant  could  not  observe  and  which  works  him  an  injury,  as,  if  the  concealed 
portions  of  a  building  be  dangerously  defective  or  if  the  building  has  been  in- 
fected with  the  germs  of  some  dangerous  disease,  (b)  In  England  and  in  some 
states  it  is  held  that  in  the  lease  of  a  furnished  house  for  a  short  period  there 
is  an  implied  covenant  or  condition  that  it  shall  be  habitable. 

2.  Repairs.  The  tenant  is  bound,  unless  otherwise  stipulated, 
to  make  repairs  to  an  extent  necessary  to  return  the  premises 
in  substantially  the  same  condition  as  when  he  received  them, 
ordinary  wear  and  tear  excepted.  To  this  end  he  is  entitled  to 
estovers,  that  is,  to  take  from  the  premises  timber  needed  for 
repairs.  The  common  law  compelled  him  to  restore  buildings 
destroyed  by  accident  or  fire,  but  in  many  states  this  harsh  rule 
has  been  changed. 

3.  Waste.  The  tenant  cannot  commit  waste  ;  that  is,  he  cannot 
cut  trees  (except  for  estovers  for  repairs  and  for  fuel),  tear  down 
buildings,  open  mines,  take  clay  or  sand,  or  otherwise  substantially 


§§  179,  ISO]  LANDLORD  AND  TENANT  291 

injure  the  freehold.  He  may  work  mines  already  opened,  unless 
restrained  by  his  lease.  A  tenant  committing  waste  is  liable  in 
treble  damages,  and  in  some  states  forfeits  his  lease.  He  may  also 
be  enjoined  by  an  equity  court  from  continuing  to  commit  waste. 

4.  Title.  The  tenant  cannot  deny  his  landlord's  title  while  in 
possession  under  the  lease.  It  would  be  a  fraud  on  the  landlord 
for  a  tenant  to  get  possession  under  a  lease  and  then  set  up  an 
adverse  claim  to  the  premises. 

179.  Assignment  and  subletting.  The  tenant  may,  unless  he 
has  contracted  not  to  do  so.,  either  assign  his  whole  interest  or 
sublet  the  premises. 

1 ,  Assignmc7it.  Unless  restrained  by  the  lease,  the  tenant  may 
assign  his  estate.  If  he  assigns  it,  he  ceases  to  have  any  estate, 
although  he  remains  liable  upon  his  covenant  to  pay  the  rent 
and  other  covenants,  unless  the  landlord  releases  him  from  such 
covenants.  The  law  may  work  an  assignment  by  the  sale  of  the 
tenant's  estate  for  debt  or  by  his  death.  As  an  estate  for  years 
is  personalty,  it  passes  to  the  executor  of  the  deceased  tenant 
and  not  to  his  heir. 

2.  Subletting.  Unless  restrained  by  the  lease,  the  tenant  may 
sublet  the  premises  or  any  part  of  them.  A  grant  of  the  lessee's 
whole  interest  is  an  assignment;  a  grant  of  a  part  of  his  inter- 
est is  a  sublease.  If  he  has  an  estate  for  ten  years  and  grants  one 
for  eight,  or  if  he  grants  a  part  of  the  premises,  this  constitutes 
a  sublease.  It  has  been  held  that  granting  a  part  of  the  prem- 
ises for  the  whole  unexpired  term  is  an  assignment  as  to  that 
part,  but  the  authorities  do  not  agree  as  to  this.  A  sublessee  is 
the  tenant  of  the  first  lessee,  not  of  the  landlord.  But  neither 
an  assignee  nor  a  sublessee,  while  in  possession,  can  deny  the 
landlord's  title. 

180.  Rent  and  remedies  for  nonpayment.  The  rent  reserved 
by  the  landlord  who  owns  a  fee  is  itself  real  property  until  due  and 
payable,  when  it  becomes  personalty.  Hence  all  rents  due  at  the 
death  of  the  owner  go  to  the  executor,  while  rents  not  accrued 
go  to  the  heir. 

The  remedies  of  the  landlord  when  the  tenant  fails  to  pay  the 
rent  arc  {a)  an  action  in  (Ubt  or  covenant  to  recover  the  amount 
due  ;   {b)  reentry  on  the  premises  if  such  right  is  reserved  in  the 


292  RKAI.    I'ROPKRTY  [Cii.  XIV 

lease  or  is  given  by  statute ;  (<)  in  some  states  a  lien  on  the  crops 
j;ro\vn  on  the  leased  premises  ;  and  (c/)  in  some  states  the  right 
of  distress,  that  is,  the  right  to  seize  tlic  chattels  of  the  tenant 
which  are  on  the  premises  and  sell  them  to  satisfy  the  rent. 

Many  states  forbid  by  statute  the  landlord  to  take  forcible 
possession  of  the  premises  in  case  the  tenant  is  delinquent, 
and  nearly  all  states  provide  a  summary  judicial  proceeding  for 
the  eviction  of  a  tenant  who  is  in  arrears. 

181.  Termination  of  lease.    A  lease  is  terminated  as  follows  : 

1.  When  the  time  fixed  in  it  expires  (as  to  tenants  at  will  and 
from  year  to  year,  see  sect.  i6o)  ; 

2.  When  surrendered  by  voluntary  act  of  the  tenant,  acquiesced 
in  by  the  landlord  ; 

3.  When  there  is  a  breach  of  the  tenant's  covenant,  which, 
by  the  terms  of  the  lease,  gives  the  landlord  a  right  to  terminate 
the  tenant's  estate  and  the  landlord  enforces  the  forfeiture ; 

4.  When  the  landlord's  title  is  extinguished,  as  when  a  life 
tenant  who  lets  the  premises  dies,  or  when  the  landlord  is  dis- 
possessed of  title  by  an  adverse  claimant ; 

5.  By  statute  in  some  states  when  the  buildings  on  the  prem- 
ises are  destroyed  without  the  tenant's  fault ;  but  at  common  law 
the  destruction  of  the  premises  will  not  terminate  the  lease  except 
where  the  tenant  has  hired  only  a  part  of  the  building. 

REVIEW  QUESTIONS 

Section  159.  How  is  property  classified  when  considered  as  an  object? 
What  two  main  classes  in  the  law?  What  is  real  estate?  What  is  personal 
estate?  What  is  corporeal  real  property  and  what  incorporeal  real  property? 
What  is  corporeal  personal  property  and  what  incorporeal  personal  property  ? 
Define  land ;  tenements ;  hereditaments.  What  practical  differences  exist 
between  realty  and  personalty  ? 

160.  How  are  estates  in  land  divided?  What  is  a  freehold  estate?  What 
two  classes?  Define  each.  How  is  each  divided?  Define  dower;  curtesy;  home- 
stead estate.    What  four  classes  of  estates  less  than  a  freehold  ?  Define  each.    . 

161.  What  is  a  future  estate  ?  What  is  a  reversion  ?  What  is  a  remainder? 
Illustrate. 

162.  What  is  a  joint  tenancy  and  how  is  it  created?  What  is  a  tenancy  in 
common?  Characteristics  of  each?  How  is  realty  held  by  a  partnership? 
What  is  a  tenancy  by  the  entireties?    What  is  community  property? 


REVIEW  QUESTIONS  293 

163.  What  is  a  private  trust ?  How  enforced?  What  is  a  charitable  trust ? 
How  enforced  ?    Illustrate. 

164.  What  is  included  in  the  term  "  land  "'  ?  What  may  one  do  with  over- 
hanging branches?    Explain  the  ownership  of  waters. 

165.  What  two  classes  of  vegetable  products?  Which  is  realty?  Which 
personalty  ?   Who  owns  a  border  tree  ? 

166.  What  is  a  fixture  ?  State  the  rules  to  determine  whether  an  article  is 
a  fixture.  What  is  meant  by  physical  annexation  ?  When  is  an  annexed  article 
clearly  a  fixture  ?  When  is  it  doubtful  ?  What  difference  does  it  make  who 
annexes  the  article?    What  may  a  tenant  remove? 

167.  What  is  the  common  law  as  to  cattle  trespass?  What  do  statutes 
provide  as  to  fences? 

168.  What  is  a  nuisance ?    What  is  lateral  support? 

169.  What  is  an  easement?  How  may  it  be  acquired?  How  in  the  case 
of  light  and  air?  How  in  the  case  of  a  right  of  way?  What  is  a  way  of 
necessity  ?    Explain  rights  in  highways. 

170.  How  must  a  contract  to  sell  land  be  made?  When  does  title  pass? 
How  does  equity  regard  this?    Illustrate. 

171.  How  are  conveyances  of  land  made?  What  is  a  quitclaim  deed? 
What  is  a  warranty  deed?  What  are  the  warranties?  How  must  a  deed  be 
executed?  Is  delivery  necessary?  What  is  an  escrow?  What  are  the  parts 
of  a  deed? 

172.  How  must  a  will  be  executed?  Explain  who  should  not  be  witnesses, 
and  why.  If  a  devisee  dies  before  the  testator,  what  becomes  of  the  devise? 
What  effect  has  subsequent  marriage  on  a  will  ?    Who  may  make  a  will  ? 

173.  If  one  dies  without  a  will,  to  whom  does  his  realty  go?  his  personalty  ? 

174.  Explain  title  by  adverse  possession. 

175.  What  is  a  mortgage?  How  is  it  executed?  Why  should  it  be  re- 
corded?  What  is  an  assignment?   What  is  a  discharge?   What  is  foreclosure? 

176.  What  other  liens  besides  mortgages  may  be  created  upon  lands? 
When  is  a  judgment  a  lien?    What  is  an  abstract  of  title? 

177.  How  is  an  estate  for  years  created?  When  does  it  begin?  What 
is  the  form  of  a  lease?  What  express  covenants  may  it  contain?  What 
covenants  arc  implied  ? 

178.  Who  takes  the  risk  as  to  defects  in  the  premises?  Exceptions?  Who 
must  make  repairs?  What  are  estovers?  What  is  waste?  What  is  the  penalty 
for  waste?   Why  can  the  tenant  not  deny  the  landlord's  title? 

179.  What  is  the  effect  of  an  assignment  of  a  lease?  When  will  it  occur? 
How  docs  a  sublease  differ  from  an  assignment? 

180.  Is  rent  realty  or  personalty?  What  arc  the  landlord's  remedies 
against  a  tenant  for  rent?    Is  forcible  entry  allowed? 

181.  How  is  a  lease  terminated? 


CHAPTER  XV 

PERSONAL  PROPERTY 
I.    Classification  :  Kinds  and  Estates 

182.  Classification.   Personal  property  consists  of  the  following  : 

1 .  Chattels  real,  that  is,  leasehold  interests  in  land.  These  have 
already  been  considered. 

2.  Chattels  personal,  including  all  property  except  property  in 
land.    Chattels  personal  are  further  divided  into : 

a.  Choses  in  possession,  or  corporeal  personal  property,  of 
which  one  may  take  physical  possession  and  control,  like  coin, 
cattle,  books,  etc. 

b.  Choses  in  action,  or  incorporeal  personal  property,  that  is,  a 
legal  right  regarded  as  an  object,  as  a  right  to  sue  for  and  recover 
a  debt,  a  right  to  share  in  the  profits  of  a  corporation,  the  right  to 
a  patent,  copyright,  or  trademark.  Such  a  right  may  be  evidenced 
by  a  chose  in  possession,  as  where  a  debt  is  evid^ced  by  a  promis- 
sory note,  an  interest  in  a  corporation  by  a  share  of  stock,  or  a 
monopoly  to  make  and  vend  an  article  by  letters  patent.  In  such 
case  the  paper  on  which  these  evidences  are  inscribed  is  a  chose 
in  possession,  but  the  right  is  incorporeal  or  "in  action." 

Personal  property  may  become  real  property  by  being  annexed  to 
land  as  a  fixture.  This  has  already  been  discussed.  Real  property 
may  become  personal  by  being  severed  from  the  land,  as  when 
a  tree  is  felled,  or  minerals  are  dug,  or  buildings  are  pulled  down. 
Some  things  growing  upon  land  or  attached  to  it  are  personalty, 
as  growing  crops,  or  articles  annexed  but  not  fixtures.  A  few 
movable  articles  are  realty,  as  the  keys  to  a  house,  the  title  deeds 
to  land,  or  separable  parts  of  a  machine  fixture. 

Of  the  various  kinds  of  personal  property  only  a  few  can  be 
considered  here. 

183.  Property  in  animals.  Animals  are  either  domesticated 
or  wild.    In  the  former  the  owner  has  absolute  property.    In  the 

294 


§  184]  CLASSIFICATION  295 

latter  one  may  have  a  qualified  property,  and  this  may  ripen  into 
an  absolute  property. 

1 .  The  owner  of  the  land  upon  which  there  are  wild  animals  has 
the  exclusive  right  to  hunt,  capture,  and  kill  them  while  they  are 
there.  Any  person  coming  on  his  land  for  such  a  purpose  without 
his  permission  is  a  trespasser ;  if  such  trespasser  kills  an  animal 
there,  it  belongs  to  the  landowner,  according  to  the  better  view. 

2.  One  who  captures  a  wild  animal  and  keeps  it  in  captivity 
has  the  exclusive  right  to  it  while  it  is  in  his  possession.  If  it 
acquires  the  habit  of  returning  after  wandering  at  large,  it  is  still 
his  ;  but  if  it  regains  its  natural  liberty  and  remains  at  large,  it 
is  no  longer  his,  but  belongs  to  anyone  who  captures  or  kills  it. 
A  mere  temporary  escape,  however,  may  not  amount  to  regaining 
its  natural  liberty,  as  where  a  canary  escapes  into  the  street,  or 
where  an  animal  escapes  from  a  menagerie. 

3.  One  who  rightfully  kills  a  wild  animal  has  the  exclusive 
property  in  it. 

4.  One  who  keeps  a  wild  animal  of  a  dangerous  or  mischievous 
disposition  docs  so  at  his  peril.    If  it  injures  another,  he  is  liable. 

5.  One  who  keeps  domestic  animals  is  liable  if  they  escape  and 
trespass  upon  another's  land.  But  he  is  not  liable  for  injuries  due 
to  their  vicious  disposition  unless  he  knows  of  such  vicious  propen- 
sity in  the  particular  animal  doing  the  injury.  Wild  animals  and 
vicious  domestic  animals,  known  to  be  such,  one  keeps  at  his  peril. 

184.  Trademarks  ;  good  will ;  names.  These  are  incorporeal 
property  rights  which  call  for  special  mention. 

I.  Trademarks.  A  trademark  is  a  name,  symbol,  or  other 
device  put  upon  goods  by  a  manufacturer  or  dealer  in  order  to 
distinguish  them  from  like  goods  of  other  persons.  It  is  a  kind 
of  commercial  seal  or  signature. 

If  the  name  or  device  is  invented  or  fanciful,  the  user  of  it  gets 
a  property  right  in  it;  but  if  it  is  a  word  of  common  use.  he 
cannot  get  an  exclusive  property  right  in  it,  although  he  might 
prevent  another  from  using  it  in  the  same  connection  for  the  j)ur- 
pose  of  deceiving  the  public.  Words  which  merely  dfsrribe  the 
article,  however,  cannot  become  in  any  sense  exclusive  iradcmarks  ; 
nor  can  geographical  names,  because  others  in  the  same  place  have 
an  equal  right  to  the  name  of  the  place  of  manufacture. 


296  PERSONAT.  PROPERTY  [Cii.  XV 

Examples.  Excelsior  Stoves,  Iloosicr  Drills,  Electro-Silicon  Powder,  Con- 
gress Water,  Champion  Flour,  303  Pens,  and  tiie  like  are  good  trademarks. 
Lackawanna  coal  is  not,  as  against  another  miner  in  the  same  locality,  nor 
Worcestershire  sauce,  nor  I'hiladelphia  cement.  But  if  one  makes  tobacco  at 
Durham  and  calls  it  "  Durham  tobacco,"  he  may  prevent  another  person  mak- 
ing tobacco  elsewhere  from  using  the  same  name.  So  if  one  changes  but  a 
single  letter,  the  legend  may  be  deceptive  though  a  different  word  is  used,  as 
where  A  has  used  the  words  "  Royal  Pens  "  and  B  puts  out  a  product  called 
"  Loyal  Pens." 

2.  Good  will.  The  good  will  of  a  business  is  the  good  opinion 
of  customers  concerning  the  business  and  the  probability  that 
they  will  continue  to  patronize  it.  It  is  a  valuable  asset  and  may 
be  sold  with  a  business.  Usually  its  sale  is  evidenced  by  the  right 
to  use  the  old  name,  perhaps  with  that  of  the  successor  added. 
The  seller,  if  he  has  included  good  will  in  the  sale  with  the  right 
to  use  his  name,  cannot  set  up  a  rival  business  under  the  same 
name.  If  there  is  no  sale  of  the  right  to  use  his  name,  he  may 
set  up  a  rival  business  under  the  name  but  cannot  represent  him- 
self as  carrying  on  the  old  business  or  as  the  successor  of  it. 

3.  Names.  A  man  may  choose  his  own  name,  although  he 
usually  bears  his  father's  surname  and  the  Christian  name  given 
him  at  his  birth.  In  order  to  avoid  the  loss  of  evidence  as  to 
identity,  statutes  provide  for  a  record  of  change  of  name  if  one 
chooses  to  avail  himself  of  it,  but  one  may  nevertheless  acquire 
a  new  name  by  usage.  The  law  disregards  all  middle  names  ;  it 
is  legally  sufficient  to  use  the  first  Christian  name  and  the  sur- 
name. So  the  word  "junior"  or  "senior"  is  merely  descriptive 
and  no  part  of  the  name.  A  man  cannot  prevent  another  from 
using  his  name  unless  the  other  uses  it  for  fraudulent  purposes. 
And  one  may  even  be  enjoined  from  so  using  his  own  name  in 
trade  as  to  work  a  fraud,  as  where,  after  A.  B.  has  sold  a  certain 
kind  of  gun  as  "A.  B.'s  gun,"  another  person  of  the  same  name 
puts  a  gun  on  the  market  stamped  "A.  B.'s  gun." 

185.  Estates  in  personal  property.  Personal  property,  like  real 
property,  may  be  owned  by  two  or  more  persons  as  joint  tenants, 
tenants  in  common,  partners,  and  in  community  (see  sect.  162  anU). 

There  may  be  a  life  interest  or  estate  in  personal  property  with 
a  remainder  or  reversion  in  another.  If  the  property  is  corporeal, 
the  life  tenant  may  possess  and  use  it ;  but  if  it  is  in  the  nature 


§186]  ACQUISITION  AND  TRAxXSFER  297 

of  money  or  securit}-,  the  executor  usually  invests  it  and  pays  the 
income  to  the  tenant  for  life.    If  the  property  is  such  as  is  con- 
sumed in  the  use,   it  must  be  intended  that  the  remainderman 
shall  have  only  what  may  be  left  at  the  life  tenant's  death. 
There  may  also  be  a  trust  of  personal  property  (see  sect.  163  a7ite). 


II.    Acquisition  axd  Transfer 

186.  Acquisition  by  occupancy  and  by  finding  lost  property. 
The  title  to  personal  property  may  be  acquired  by  taking  posses- 
sion of  what  no  one  owns  or  by  taking  possession  of  what  some 
one  has  lost  but  never  reclaims. 

1 .  Occupancy.  Personal  property  may  be  acquired  by  occupancy, 
that  is,  by  taking  into  one's  possession  what  previously  belonged 
to  no  one  or  what  has  been  abandoned  by  a  previous  owner.  The 
taking  of  wild  animals,  the  taking  of  fish,  and  the  taking  of  sea- 
weed on  one's  own  property  or  on  property  common  to  all  are 
examples  of  the  first  method.  Raising  a  sunken  vessel  abandoned 
by  the  owner  would  be  an  example  of  the  second. 

2.  Lost  p7-opcrty.  Lost  property  calls  for  special  consideration. 
The  general  rule  as  to  the  title  of  the  finder  is  that  if  one  finds 
and  appropriates  lost  property,  he  has  a  title  good  against  all  but 
the  true  owner. 

The  law  distinguishes,  however,  between  lost  property  and  mis- 
laid property.  If  one  finds  a  pocketbook  on  the  fioor  of  a  store,  it 
is  lost  property  and  belongs  to  the  finder  unless  the  true  owner 
reclaims  it.  But  if  he  finds  a  pocketbook  on  the  counter  of  a  store, 
it  is  mislaid  or  left  property  and  belongs  to  the  owner  of  the  store 
as  bailee  for  the  true  owner,  instead  of  to  the  finder.  Should  the 
true  owner  never  reclaim  it,  the  storekeeper  retains  it. 

Treasure-trove  is  money,  coin,  or  bullion  hidden  or  concealed 
in  the  earth  or  other  secret  place.  In  ICngland  it  belongs  to  the 
crown  if  no  true  owner  claims  it.  In  this  country  it  is  generally 
treated  as  lost  property  and  belongs  to  the  finder  as  against  ihe 
owner  of  the  lands  where  it  is  discovered. 

Statutes  often  regulate  the  rights  of  finders  of  lost  ])roperty, 
and  generally  require  the  finder  to  advertise  the  pro])erty  found. 
In  case  the  true  owner  does  not  reclaim  it,  some  statutes  provide 


298  PERSONAL  PROPERTY  [Cn.  XV 

that  the  property  or  its  proceeds  shall,  in  whole  or  in  part,  go  to 
some  public  fund.  The  rights  of  finders  of  estrays  (lost  cattle) 
are  particularly  governed  by  statute. 

If  the  finder  knows  who  the  owner  is,  or  if  the  property  dis- 
closes to  whom  it  belongs,  the  finder  is  guilty  of  larceny  in  keep- 
ing the  property  as  his  own.  But  in  order  that  this  rule  shall 
apply,  the  finder  must  know  these  facts  at  the  time  of  the  finding, 
and  then  form  the  felonious  intent. 

Examples :  \.  X  bought  an  old  safe  and  delivered  it  to  A  to  repair.  A 
found  in  the  space  between  the  outer  wall  and  the  lining  a  sum  of  money. 
A  may  retain  the  money  as  against  X. 

2.  A  customer  in  a  shop  laid  his  pocketbook  on  a  table  and  went  away  and 
forgot  it.  Another  customer  found  it  there.  The  shopkeeper  is  entitled  to  it 
as  against  the  finder. 

3.  A  was  working  for  X  in  the  latter's  paper  mill,  and  in  picking  over  rags 
and  paper  found  a  number  of  bank  bills.    A  is  entitled  to  them  as  against  X. 

4.  A  conductor  on  a  railway  train  finds  a  pocketbook  in  the  train.  It 
belongs  to  the  conductor  as  against  the  railway  company. 

5.  A  and  B,  while  working  for  X  in  removing  an  old  building,  discovered  a 
rusty  tin  can  containing  a  large  sum  of  money.  Who  hid  it  there  is  unknown. 
The  money  belongs  to  A  and  B  as  against  X. 

187.  Accession  and  confusion.  Title  by  accession  arises  from 
the  following  circumstances :  the  natural  increase  from  land  and 
animals  ;  the  uniting  of  the  property  or  labor  of  one  with  the 
property  of  another ;  the  confusion  of  the  goods  of  one  with  the 
goods  of  another, 

1.  Natural  increase.  It  is,  of  course,  too  plain  for  argument 
that  if  one  owns  land  he  owns  its  increase,  whether  produced  by 
nature  or  by  industry.  So,  too,  if  one  owns  animals  he  owns 
their  young,  the  rule  being  that  the  offspring  go  with  the  dam, 
or  mother. 

2.  Accession  of  chattels,  [a)  If  the  chattel  of  one  is,  without 
his  consent,  united  wdth  the  land  of  another  so  as  to  become  a 
fi.xture,  the  chattel  becomes  realty  and  belongs  to  the  owner  of 
the  land  ;  the  owner  of  the  chattel  has  only  an  action  for  dam- 
ages for  conversion.  This  is  because  the  land  is  regarded  as  the 
principal  thing  and  the  chattel  as  an  accessory. 

(b)  A  similar  rule  applies  when  the  chattel  of  one  is  insepara- 
bly united  with  the  chattel  of  another  :  the  whole  belongs  to  the 


I 


§187]  ACQUISITION  AND  TRANSFER  299 

owner  of  the  principal  chattel,  while  the  owner  of  the  accessory 
chattel  has  only  an  action  for  conversion.  Should  the  chattels  be 
of  approximately  similar  kind  and  value,  the  owners  would  become 
owners  in  common  of  the  new  product.  A  thing  may  be  acces- 
sory, however,  which  is  of  greater  value  than  the  principal  chattel, 
if  the  latter  gives  its  name  and  character  to  the  whole,  as  where 
materials  of  greater  value  than  an  old  wagon  are  used  to  repair 
and  renovate  it.  So,  too,  things  of  inferior  value  may  by  their 
owner  be  united  by  his  labor  or  skill  with  things  of  greater 
value  so  as  to  create  a  practically  new  thing  which  will  belong 
to  him,  as  where  with  a  smaller  quantity  of  his  wool,  united 
with  a  greater  quantity  of  another's  wool,  he  weaves  cloth,  or 
with  a  smaller  quantity  of  his  material,  united  with  a  larger 
quantity  of  another's,  he  makes  a  ship,  or  furniture,  or  gold  or 
silver  ornaments. 

(r)  If  a  workman  makes  a  new  product  by  putting  labor  upon 
another's  chattel  so  that  there  is  a  complete  change  of  identity, 
the  product  belongs  to  the  workman.  If  there  is  not  a  com- 
plete change  of  identity,  the  chattel  will  belong  to  him  if  the 
labor  innocently  bestowed  is  the  principal  item  in  the  value  of 
the  new  product,  but  will  belong  to  the  owner  of  the  chattel 
if  the  latter  is  the  principal  item  in  the  value  of  the  new 
product.  This  last  rule  is  qualified  where  the  workman  knows 
the  material  is  not  his,  many  courts  holding  that  in  such  case 
he  must  lose  his  labor,  although  it  may  be  more  valuable  than 
the  chattel. 

Examples :  i.  B  uses  some  links  belonging  to  C  in  making  a  chain  most 
of  which  was  made  from  his  own  links.  The  chain  is  wholly  B's.  Had  the 
links  of  C  about  equaled  those  of  15  in  number,  the  two  would  have  been 
owners  in  common. 

2.  15  takes  ?8  worth  of  canvas  belonging  to  him  and  $40  worth  belonging 
to  C,  adds  ?io  worth  of  labor,  and  makes  a  sail.    The  sail  belongs  to  C. 

3.  B  by  mistake  cuts  wood  on  C's  land.  The  wood  as  it  was  while  grow- 
ing was  worth  about  53  a  cord.  B's  labor  in  cutting  it  is  worth  about  ?2 
a  cord.    The  wood  belongs  to  C. 

4.  B  by  mi.stake  takes  C's  trees,  worth  about  ?25,  and  makes  ihcm  into 
hoops  worth  about  ?700.  The  hoops  belong  to  B.  A  small  excess  of  value  of 
the  labor  would  not  be  enough  to  deprive  C  of  his  property,  but  if  the  excess 
is  great,  the  labor  becomes  clearly  the  principal  thing  and  the  material  the 
accessory  thing. 


3CX)  rKRSOXAT,   rROPER'l'V  [Cii.  XV 

5.  As  above.  B  knows  the  trees  belong  to  C,  and. puts  the  labor  upon 
them.  C  may  claim  the  hoops.  B  loses  his  labor  because  of  his  own  conscious 
wrong  in  converting  C's  property. 

6.  In  Example  5,  B  sells  the  hoops  to  X,  an  innocent  purchaser.  C  may 
reclaim  them.    Since  B  had  no  title,  he  could  give  none. 

3.  Confusion  of  goods.  If  the  goods  of  one  are  so  confused 
with  the  hke  goods  of  another  that  they  cannot  be  distinguished 
and  separated,  the  tide  to  the  mass  will  depend  {a)  upon  the  inno- 
cence or  willfulness  of  the  owner  who  caused  the  confusion,  and 
(/;),  if  willful,  upon  the  possibility  of  clearly  proving  how  much  of 
his  product  is  in  the  mixture,  {a)  If  the  confusion  is  innocent, 
each  will  be  entitled  to  his  aliquot  portion  of  the  mass  as  that 
may  be  reasonably  established.  The  same  rule  applies  where  the 
confusion  is  by  consent,  as  where  wheat  of  several  owners  is  min- 
gled in  a  warehouse,  {h)  If  the  confusion  is  willful,  the  one  caus- 
ing it  can  claim  his  share  only  if  he  can  clearly  and  decisively 
prove  how  much  of  each  was  mingled ;  failing  in  this,  he  forfeits 
the  whole  mass  to  the  innocent  party. 

188.  Transfer  by  gift.  A  gift  is  a  transfer  of  property  by  the 
owner  without  consideration.  A  gift  inter  vivos  is  a  gift  to- take 
effect  at  once  by  transfer  of  absolute  possession  to  the  donee,  and 
is  irrevocable.  A  gift  ca^isa  mortis  is  a  gift  made,  by  one  in  peril 
of  imminent  death,  by  transfer  to  the  donee,  but  upon  condition 
that  if  the  donor  survives  the  peril,  he  may  revoke  the  gift  and 
reclaim  the  property. 

In  a  gift  inter  vivos,  delivery  is  the  essential  requisite,  coupled, 
of  course,  with  the  intent  to  transfer  as  a  gift.  An  intent  to  give 
is  not  enough.  A  promise  to  give  is  not  effective,  because  there  is 
no  consideration  for  the  promise.  There  must  be  actual  delivery, 
so  as  to  put  the  subject  matter  of  the  gift  out  of  the  control  of 
the  donor.  If  the  article  is  one  that  may  be  delivered  by  manual 
transfer,  that  form  should  be  followed.  But  if  it  is  bulky,  or  in 
the  hands  of  a  third  person,  a  symbolic  delivery  will  do,  as  the 
delivery  of  a  key  to  the  place  where  the  article  is  kept,  or  the 
transfer  of  a  warehouse  receipt ;  but  the  delivery  of  the  donor's 
own  check  (order)  on  a  bank  is  not  effective  as  a  gift  unless, 
before  the  death  of  the  donor,  the  donee  actually  obtains  the 
money.    If  the  donee  is  already  in  possession,  no  new  delivery 


§1SS]  ACQUISITION  AND  TRANSFER  30T 

is  necessar}- ;  it  is  enough  to  show  clearly  the  words  of  the  gift. 
So  a  deed  of  gift  duly  delivered  will  take  the  place  of  the  delivery 
of  the  subject  matter  itself.  If  one  wishes  to  forgive  a  debt,  he 
should  give  the  debtor  a  release  under  seal ;  but  a  receipt  in  full 
duly  delivered  and  the  balancing  of  the  account  on  the  books  of 
the  donor  have  been  held  sufficient. 

In  a  gift  causa  mortis  delivery  is  also  necessary.  The  peculi- 
arity of  this  gift  is  that  it  must  be  made  in  contemplation  of  im- 
minent death  (not  merely  of  human  mortality),  and  that  it  is  to 
become  absolute  only  in  case  the  donor  dies,  of  the  illness  or  peril 
then  existing,  without  having  revoked  the  gift.  If  he  recovers  or 
escapes  the  peril,  he  may  reclaim  the  gift,  and  he  may  before  his 
death  revoke  it.  One  in  his  last  illness  may  make  an  absolute  gift 
inter  vivos  or  a  conditional  gift  causa  mortis,  and  it  is  a  question 
of  fact  whether  he  intended  to  make  the  one  or  the  other.  A  gift 
causa  mortis  bears  considerable  resemblance  to  a  legacy  in  a  will, 
differing  mainly  in  this,  that  the  article  is  delivered  to  the  donee 
before  the  death  of  the  donor,  and  no  writing  is  necessary. 

Examples  /  i.  A  father  places  in  an  envelope  certain  articles  and  securities, 
indorses  it,  "  The  inclosed  are  for  my  son  John,"  signs  his  name,  and  puts  the 
envelope  and  its  contents  into  his  safe,  where  they  are  found  after  his  death. 
This  is  not  a  valid  gift.    There  has  been  no  delivery. 

2.  A  father  gave  to  X  a  bag  of  coin,  saying  the  contents  were  for  his  daughter. 
This  was  a  valid  gift.    The  delivery  may  be  to  a  third  person  for  the  donee. 

3.  A  father  loaned  his  son  a  horse  and  buggy.  After  the  son  had  posses- 
sion, the  father  said,  "  I  give  you  that  horse  and  buggy."  This  was  a  valid  gift. 
There  need  not  be  a  new  delivery  at  the  time  of  the  gift. 

4.  A  father  in  contemplation  of  immediate  death  gave  to  his  son  his  (the 
father's)  promissory  note  for  $1000,  and  to  his  daughter  his  (the  father's) 
check  on  a  bank  for  5 1000.  The  first  gift  is  invalid  ;  it  is  a  mere  promise  to  pay 
or  to  give.  The  second  gift  is  valid  if  the  check  is  cashed  before  the  father's 
death,  but  the  death  of  the  father  revokes  the  authority  of  the  bank  to  pay  it. 

5.  A  father  gives  and  delivers  to  his  son  the  promissory  note  of  X,  and  to 
his  daughter  the  check  of  Y.  These  are  valid  gifts.  If  the  instruments  are 
payable  to  the  father's  order,  he  should  indorse  them,  but  his  failure  to  do  so 
will  not,  it  seems,  render  the  gift  invalid,  although  the  courts  are  not  entirely 
in  harmony  upon  that  point. 

6.  A  donor  in  his  last  illness  told  the  nurse  that  his  pocketbook  was  under 
the  pillow,  and  that  she  was  to  take  it  and  give  it  to  his  son.  After  his  death 
the  nurse  took  it  and  gave  it  to  the  .son.  This  was  not  a  valid  gift,  because 
there  was  no  delivery  in  the  lifetime  of  the  donor. 


302 


PERSONAL  PROPER  TV  [Cu.  XV 


7.  The  donor  has  money  deposited  in  a  savings  bank.  He  delivers  the 
savings-bank  book  to  the  donee  as  a  gift.  Most  courts  hold  this  suflicient  to 
constitute  a  valid  gift.  It  would  not  be  sufiicient  in  the  case  of  an  ordinary 
deposit  in  a  bank  of  deposit ;  in  such  case  there  must  be  a  due  and  formal 
assignment  of  the  claim  against  the  bank. 

8.  If  IJ,  with  the  intent  to  make  a  gift  to  C,  deposits  money  in  a  savings 
bank  in  the  name  of  C,  and  takes  the  savings-bank  book  in  C's  name,  there  is 
a  valid  gift.  Ikit  intent  must  be  established ;  it  may  be  that  the  deposit  was 
made  in  this  way  because  B  had  already  deposited  in  his  own  name  all  that 
the  rules  of  the  bank  ix-rmitted.  The  delivery  of  the  book  to  C  would  be  quite 
decisive  of  intent,  but  this  is  not  essential  if  intent  otherwise  appears,  as  from 
a  declaration  that  he  has  made  the  gift. 

9.  One  may  make  a  gift  in  the  form  of  a  trust  cither  (n)  by  declaring  that 
he  holds  a  sum  of  money  in  trust  for  C  or  (d)  by  transferring  the  sum  to  T  to 
hold  in  trust  for  C.  In  the  first  case  there  is  an  "  equitable  gift "  without  any 
deliver}'  and  by  a  mere  declaration. 

189.  Other  modes  of  transfer.  Other  modes  of  transfer  are  by 
sale,  will,  distribution  when  the  owner  dies  intestate,  seizure  and 
sale  for  debt,  mortgage,  and  at  common  law  by  marriage.  Only 
a  word  need  be  added  as  to  these. 

A  chattel  mortgage  is  the  transfer  of  the  title  to  personal  prop- 
erty as  security  for  a  debt,  upon  condition  that  if  the  debt  is  duly 
paid,  the  mortgage  and  transfer  shall  be  null  and  void.  It  is  gen- 
erally provided  that  in  order  to  be  valid  against  subsequent  pur- 
chasers or  mortgagees  in  good  faith,  the  chattel  mortgage  must 
be  duly  recorded,  and  some  states  require  it  to  be  renewed  annu- 
ally in  order  to  remain  valid.  Unless  otherwise  stipulated,  the 
mortgagee  is  entitled  to  possession,  but  it  is  usual  to  leave  the 
mortgagor  in  possession  until  default  or  until  the  mortgagee  feels 
insecure.  When  possession  is  taken  after  default,  the  mortgagee 
becomes  the  owner  of  the  goods  at  law,  but  equity  gives  the 
mortgagor  a  right  to  redeem  them.  To  cut  off  this  right  the  mort- 
gagee forecloses  it  by  a  sale  of  the  goods  either  under  a  judicial 
proceeding  or,  if  the  mortgage  gives  him  a  power  of  sale,  without 
such  proceeding.    Most  states  have  statutes  regulating  foreclosures. 

At  common  law  a  husband  was  entitled  to  all  the  personal 
property  owned  by  the  wife  at  the  time  of  the  marriage.  Most 
states  have  changed  this  rule  by  providing  that  a  married  woman 
shall  continue  to  own  and  control  all  her  property  the  same  as 
an  unmarried  woman. 


REVIEW  QUESTIONS  303 

REVIEW  QUESTIONS 

Section  182.  Of  what  does  personal  property  consist  ?  What  are  choses 
in  action?  When  does  personal  property  become  realty?  When  does  real 
property  become  personalty  ?    What  property  attached  to  land  is  personalty  ? 

183.  What  right  has  a  landholder  in  wild  animals  on  his  land?  What 
sort  of  property  has  one  in  a  captured  animal?  How  is  it  lost?  If  one  kills  a 
wild  animal,  whose  is  it?  For  what  damage  done  by  his  domestic  animals  is 
one  liable?  by  wild  animals  kept  in  captivity? 

184.  What  is  a  trademark?  When  is  it  property?  If  not  property,  has 
anyone  a  right  to  use  it?  What  is  good  will?  What  property  has  one  in  his 
name?   What  is  the  name  recognized  by  the  law  as  sufficient? 

185.  What  estates  in  personal  property? 

186.  What  is  title  by  occupancy?  Who  owns  lost  and  found  property? 
A\'hat  is  mislaid  property?  What  is  treasure-trove?  Who  owns  it?  When  is 
a  finder  of  lost  property  guilty  of  larceny? 

187.  What  is  title  by  accession?  If  the  chattels  of  different  owners  are 
annexed,  who  ov/ns  the  article  so  made?  If  one  puts  labor  on  another's  chattel 
and  increases  its  value,  who  owns  it?  Distinguish  and  illustrate.  If  one  inno- 
cently mixes  his  goods  with  those  of  others,  who  owns  the  mass?  If  one 
willfully  mixes  them,  who  owns  the  mass? 

188.  What  is  a  gift  inter  vivos'i  What  is  a  gift  causa  mortis}  Explain 
the  essentials  of  each.  How  can  one  make  a  gift  of  a  debt  to  his  debtor?  Is 
a  gift  revocable?  Can  one  make  a  gift  of  his  own  promissory  note  or  check, 
and  why?  When  is  a  gift  of  a  savings-bank  deposit  good?  Can  one  make  a 
gift  inter  vivos  without  delivery? 

189.  What  other  modes  of  transfer  of  personalty?  What  is  a  chattel  mort- 
gage? Why  should  it  be  recorded?  Who  is  entitled  to  possession  of  the 
mortgaged  chattels?  After  default  where  is  the  title?  What. is  the  equity  of 
redemption  and  how  is  it  disposed  of?  What  effect  has  marriage  on  the  title 
to  personalty? 


GLOSSARY 


[Terms  fully  defined  in  the  text  are  not  included  in  this  Glossary.    For  such  terms  the 
Index  should  be  consulted.] 


Abstract  of  title.  An  outline  history  of 
the  title  to  land,  consisting  of  a  synop- 
sis, or  summary,  of  all  conveyances, 
mortgages,  liens,  and  charges  affect- 
ing the  parcel  of  land  in  question. 

Acceptance,  {n)  The  assent  of  the  of- 
feree to  the  proposal  of  the  offeror, 
thus  concluding  a  contract ;  (/>)  the 
act  by  which  the  drawee  of  a  bill  of 
exchange  assents  to  the  request  of 
the  drawer  to  pay  it  and  makes  him- 
self liable  to  pay  it. 

Acceptor.  The  person  who  accepts  a 
bill  of  exchange. 

Acceptor  supra  protest.  The  person 
who,  after  it  is  protested,  accepts  a 
bill  of  exchange  for  the  honor  of  the 
drawer  or  an  indorser. 

Accession.  («)  That  which  is  united  to, 
or  produced  by,  property;  {i>)  the  right 
to  all  that  one's  property  produces  or 
that  is  united  to  one's  property. 

Accommodation  paper.    A  bill  or  note 

to  which   the  accommodating  party 

puts  his  name  as  indorser,  maker,  or 

'  drawer  without  consideration,  in  order 

to  lend  his  credit  to  another. 

Acknowledgment.  («)  In  conveyancing, 
t!'.e  act  by  which  one  who  has  exe- 
cuted a  deed  or  other  instrument 
goes  before  a  notary  public  or  other 
authorized  oflficer  and  declares  or 
acknowledges  that  he  did  execute  the 
same;  {/>)  the  certificate  of  the  officer 
to  that  effect. 

Act  of  God.  Inevitable  accident  beyond 
human  foresight  or  control.  See  I'ls 
major. 


Act  of  honor.  The  instrument  drawn 
up  by  a  notary  certifying  that  a  bill 
has  been  protested  and  that  a  person 
named  has  accepted  or  paid  it  for  the 
honor  of  the  drawer  or  an  indorser. 

Action.  The  proceeding  in  a  court  for 
the  enforcement  of  a  right ;  also  called 
a  suit. 

Administrator.  A  person  appointed  by 
the  court  to  administer  the  estate  of 
a  deceased  per.5on  who  has  not  by  will 
named  an  executor.  The  feminine 
form  of  this  word  is  "administratrix." 

Admiralty.  (</)  The  system  of  law  gov- 
erning maritime  causes;  (/')  the  court 
administering  this  law. 

Adult.  One  of  full  legal  age,  usually 
twenty-one  years. 

Adverse  possession.  A  possession  of 
real  property  adverse  to  the  right  or 
title  of  another.  If  continued  for  a 
specified  period,  usually  twenty  years, 
it  cuts  off  the  right  of  the  other  to 
reclaim  the  property. 

Affidavit.  A  written  declaration  under 
oath. 

Agistor.  One  who  pastures  cattle  for 
another. 

Aleatory  (Latin  (ilea,  a  die,  or  chance). 
Depending  upon  an  uncertain  event. 

Alienate.  To  convey;  to  transfer  the 
title  to  property. 

Allonge.  The  strip  of  paper  attached 
to  a  bill  or  note  to  receive  further 
indorsements  after  the  back  of  the 
instrument  is  filled. 

Alteration.  A  change  in  the  terms  of 
a  written  instrument. 


305 


3o6 


GLOSSARY 


Ambiguity,  noubtfulness,  or  tUnihK' 
iiess,   of  meaning. 

Ancestor.  Owv  from  whom  a  person  has 
descended  in  a  direct  hue.  Sometimes 
used  in  the  broader  sense  of  one  from 
whom  a  person  has  inlierited  lands. 

Annuity.  A  yearly  sum  stipulated  to 
be  paid  to  -a  person. 

Answer.  (</)  In  pleading,  the  matter  set 
up  by  way  of  defense  to  an  action ; 
(/>)  a  formal  written  statement  con- 
taining the  defense  to  an  action. 

Ante  (Latin)  before.  Used  in  referring 
to  a  preceding  pSrt  of  a  book. 

Appeal.  The  removal  of  a  cause  from 
an  inferior  to  a  superior  court  in 
order  to  have  the  action  of  the  lower 
court  reviewed. 

Articles.  A  contractual  document  con- 
taining the  terms  of  an  agreement. 

Assets,  (a)  Property  of  a  deceased 
person  or  a  bankrupt  available  for 
payment  of  debts;  (/')  the  aggregate 
available  property  of  a  merchant. 

Assignment.  The  transfer  of  rights  or 
interests. 

Attachment.  A  process  by  which  prop- 
erty is  seized  pending  a  suit. 

Bankrupt.  A  person  who  under  the 
bankruptcy  laws  is  liable  to  have  his 
property  seized  and  distributed  among 
his  creditors. 

Beneficiary,  {a)  A  person  entitled  to 
the  income  or  enjoyment  of  property 
the  title  to  which  is  held  by  another 
as  trustee;  (d)  the  person  to  whom 
a  life-insurance  policy  is  payable. 

Bequeath.  To  give  personal  property 
by  will  to  another. 

Bequest.  A  legacy  or  gift  of  personal 
property  by  will. 

Bilateral.  In  contract,  signifying  an 
agreement  executory  on  both  sides. 

Bona  fides  (Latin)  good  faith.  Bofia 
Jide,  in  good  faith. 


Bond.  A  sealed  obligation  to  pay 
money.  A  l)t)nd  and  mortgage  con- 
sists of  a  bond  with  a  mortgage  to 
secure  its  payment. 

Bought  note  and  sold  note.  A  bought 
note  is  given  to  the  seller  and  a  sold 
note  is  given  to  the  buyer  by  a  broker 
who  acts  as  agent  between  the  parties. 
These  are  memoranda  of  the  contract. 

Boycott  (from  the  name  of  one  Boy- 
cott, who  was  agent  for  an  estate  in 
Ireland),  {a)  A  combination  to  cease 
dealing  with  a  person;  (l>)  a  conspir- 
acy to  induce  others  to  cease  dealing 
w'ith  a  person. 

Breach.  The  violation  or  nonfulfill- 
ment of  an  obligation. 

By-laws.  Regulations  or  rules  adopted 
by  a  corporation  for  its  own  govern- 
ment. 

Cargo.  Goods  and  merchandise  put  on 
board  a  ship  to  be  carried  from  one 
port  to  another. 

Case.  A  statement  of  facts  upon  which 
an  action  in  a  court  is  based. 

Caveat  emptor  (Latin).  Let  the  buyer 
beware. 

Caveat  venditor  (Latin).  Let  the  seller 
beware. 

Champerty.  A  bargain  by  which  an 
attorney  agrees  to  carry  on  a  suit  at 
his  own  risk  and  cost  in  considera- 
tion that  he  shall  receive  in  case  of 
success  a  part  of  the  proceeds  of 
the  suit. 

Chancery.  (</)  A  court  of  equity;  (/')  the 
system  of  jurisprudence  administered 
in  a  court  of  equity. 

Charter,  (a)  A  legislative  act,  together 
with  proceedings  taken  thereunder, 
by  which  a  corporation  is  created ; 
(/')  to  hire  or  lease  a  vessel. 

Charter  party.  The  contract  by  which 
a  vessel  or  some  principal  part  there- 
of is  let  for  a  voyage. 


GLOSSARY 


307 


Chattel.  An  article  of  personal  prop- 
erty. A  more  comprehensive  phrase 
than  "goods,"  since  il  includes  chat- 
tels real. 

Chattel  real.  A  chattel  interest  in 
land,  as  a  leasehold. 

Chose.  A  thing;  any  article  of  property. 
A  chose  in  action  is  a  right  of  ac- 
tion to  recover  a  debt,  demand,  or 
thing. 

Civil  action.  An  action  to  establish  a 
private  right,  as  distinguished  from  a 
criminal  action. 

Civil  law.  The  Roman  law  as  distin- 
guished from  the  English  law. 

Code.  A  legislative  enactment  intended 
to  embody  the  law  on  a  particular 
topic  or,  as  in  some  states,  on  all 
topics. 

Collateral.  («)  In  the  law  of  descent,  in 
a  side  line,  not  direct  or  lineal;  (^)  in 
commercial  law,  a  security  additional 
to  the  personal  obligation. 

Commercial  paper.  Bills,  notes,  and 
checks  given  in  the  course  of  com- 
mercial transactions.  It  does  not  in- 
clude accommodation  paper. 

Common  law.  {a)  The  law  of  Eng- 
land, as  distinguished  from  the  civil 
law ;  (/>)  that  part  of  the  law  of  Eng- 
land developed  by  the  common-law 
courts. 

Complaint.  The  name  of  the  pleading 
by  the  plaintiff  in  an  action  at  law. 
Sometimes  called  a  declaration. 

Composition.  An  agreement  between 
an  insolvent  debtor  and  his  creditors 
whereby  the  latter  agree  to  take  less 
than  the  whole  of  their  claims. 

Compromise.  An  agreement  to  settle 
a  dispute  made  in  view  of  the  un- 
certainty of  legal  rights. 

Conversion.  An  unauthf>rized  assumjv 
ti<)t\  and  exercise  of  ownership  over 
goods  belonging  to  another.  It  is  a 
tort. 


Conveyance.  An  instrument  in  writing 
under  seal,  by  which  any  estate  in  real 
])roperty  is  created,  aliened,  mort- 
gaged, or  encumbered. 

Copyright.  An  exclusive  right  granted 
by  the  government  to  multiply  and 
sell  a  literary  or  artistic  production. 

Corporeal.  Having  an  objective,  mate- 
rial existence. 

Costs.  An  allowance  made  to  a  success- 
ful party  to  a  suit,  to  compensate 
for  his  expenses  in  conducting  it. 

Covenant.  A  promise  contained  in  a 
sealed  instrument. 

Custom.  In  law,  a  usage  so  well  estab- 
lished as  to  be  regarded  as  having 
the  force  of  law. 

Damages.  A  pecuniary  compensation 
recovered  in  a  court  for  some  in- 
jury or  loss  sustained  through  the 
wrongful  act  or  omission  of  an- 
other. 

Deceit.  .\  fraudulent  representation  or 
device  by  which  a  person  is  misled 
to  his  damage. 

Declaration.  The  pleading  in  which  a 
plaintiff  states  his  cause  of  action. 
.See  Complaint. 

Decree.  The  name  given  to  the  judg- 
ment of  a  court  of  equity. 

Deed.  A  sealed  instrument  containing 
a  contract  or  conveyance. 

Defendant.  The  person  against  whom 
an  action  is  begun. 

Del  credere  (Italian)  of  trust  or  ciedit. 
Ai)plied  to  an  agent  who  guaranties 
that  purchasers  will  pay  for  goods  of 
the  i)rinci])al  sold  to  them. 

Descent.  In  real  property,  the  title 
given  by  force  of  law  upon  the  death 
of  an  owner. 

Devise.  A  gift  of  real  property  con- 
tained in  A  will.  The  devisee  is  the 
one  to  whom  it  is  given;  tiie  devisor 
is  the  one  who  gives  it. 


;oi^ 


GLOSSARY 


Earnest.    A  sum  paid  to  bind  a  bargain. 

Easement.  .V  right  in  the  owner  of  one 
parcel  of  land,  as  owner,  to  a  use  in 
the  land  of  another. 

Emblements,  .\niui.il  products  of  the 
soil  raised  by  labor  and  industry. 

Encumbrance.  A  claim,  lien,  or  liability 
attached  to  property,  as  a  mortgage, 
judgment,  etc. 

Equity.  The  system  of  jurisprudence 
administered  in  the  equity  courts. 
See  Chancery. 

Equity  of  redemption.  The  period 
allowed  by  equity  for  a  mortgagor, 
pledgor,  etc.  to  reclaim  his  property 
by  paying  the  debt  secured  by  it. 

Escrow.  A  deed  delivered  to  a  third 
person  to  be  held  until  the  happen- 
ing of  some  contingency,  and  then 
delivered  to  the  grantee. 

Estate.  The  interest  one  has  in  prop- 
erty. Sometimes  used  broadly  to  in- 
clude all  of  one's  possessions. 

Estoppel.  A  bar  raised  by  the  law  to 
preclude  a  man  from  setting  up  cer- 
tain facts  because  of  some  prior 
admission  or  conduct.  The  verb  is 
"  to  estop." 
Estovers.  The  right  of  a  tenant  to  take 
wood  necessary  for  fuel,  fences,  and 
repairs  is  called  a  right  to  estovers. 
Executor.  A  person  appointed  by  the 
maker  of  a  will  (the  testator)  to  carry 
out  its  provisions.  The  feminine  form 
of  the  word  is  "  executrix." 


are  cut  off  and  only  particular  heirs 
are  designated. 
Fiduciary.  (<»)  As  a  noun,  a  person  in 
a  relation  of  trust  or  confidence ; 
(/')  as  an  adjective,  signifying  a  rela- 
tion of  trust  or  confidence. 
Forcible  detainer.    Keeping  possession 

of  lands  by  force. 
Forcible  entry.    Taking  possession  of 

lands  by  force. 
Foreclosure.     A  proceeding  for  extin- 
guishing the  right  of  a  mortgagor  or 
pledgor  to  redeem  the  property  given 
as  security  for  a  debt. 
Forgery.    Fraudulently  making  or  alter- 
ing a  writing  which  purports  to  create 
or  modify  a  legal  right  against  an- 
other. 
Franchise.     A    special    privilege    con- 
ferred by  law  upon  an  individual  or 
a  corporation,  which  does  not  belong 
to  persons  of  common  right. 
Fraud.    Some  willful  act  or  device  cal- 
culated   to    influence    or   mislead   a 
person  to  his  prejudice. 
Fructus  industriales  (Latin).    Fruits  of 
industry;  .products  of  land  raised  by 
labor. 
Fructus   naturales   (Latin).      Fruits    of 

nature;  natural  products  of  land. 
Fungible.  Capable  of  being  estimated 
or  replaced  by  weight,  measure,  or 
number  without  reference  to  the 
particular  characteristics  of  each 
unit. 


Fee  (same  as  feud  or  fief).    Originally 

land    held    of    a    superior    lord    in 

consideration     of     military     service. 

Now    an    estate    of    inheritance    iii 

lands. 
Fee  simple.    An  absolute,  unqualified 

fee ;  the  largest  estate  one  can  have 

in  lands. 
Fee  tail  (from  French  tailU,  a  cutting). 

A  fee  from  which  the  general  heirs 


Good  consideration.  A  consideration 
based  on  family  relationship  or  love 
and  affection.  A  valuable  considera- 
tion is  one  based  on  the  surrender  of 
something  having  a  legal  value. 

Goods.  Articles  of  personal  property. 
Usually  applied  to  inanimate  mov- 
ables.   "  Chattel  "  is  a  broader  term. 

Grant.  A  term  signifying  a  transfer  by 
deed  of  an  interest  in  real  property. 


GLOSSARY 


309 


Heir.  The  person  to  whom  by  law  the 
title  to  real  estate  descends  upon  the 
death  of  his  ancestor. 

In  statu  quo  (Latin).  In  the  condition  in 

which  (one  was  before). 
In  transitu  (Latin).    In  transit. 

Incorporeal.  Without  body  or  material 
substance. 

Indemnify.  To  save  harmless ;  to  se- 
cure against  loss  or  damage. 

Indenture.  Formerly  a  deed  in  two 
copies  with  cut  or  serrated  edges  so 
that  one  would  fit  into  the  other.  Now 
any  deed  by  which  two  or  more  parties 
enter  into  reciprocal  obligations. 

Indorse.   Literally,  write  on  the  back  of. 

Injunction.  A  writ  issued  by  a  court 
of  equity,  forbidding  or  commanding 
something. 

Insolvency.  Inability  to  pay  debts  in 
due  course. 

Inter  vivos  (Latin).    Between  the  living. 

Intestate.   Without  a  will  or  testament. 

Joint  and  several.  An  obligation  by 
two  or  more  which  may  be  enforced 
against  all  jointly  or  each  individually. 

Judgment.  The  decision  of  a  common- 
law  court  in  an  action  before  it ;  the 
final  determination  of  the  rights  of 
the  parties. 

L.  S .  Abbreviation  for  locus  sigilli  (place 

of  the  seal). 
Law.    The  rules  by  which  courts  are 

controlled  in   the   administration  of 

justice. 
Legacy.    A  gift  of  personal  property  by 

will  and  testament. 
Levy.    A  seizure  of  property  to  satisfy 

a  judgment. 
License.    A  permit  to  do  an  act  which 

would  otherwise  be  illegal,  as  to  enter 

another's  lands,  but  not  creating  an 

ea.sement. 


Lien.  A  charge  imposed  upon  property 
by  which  it  is  made  security  for  ^ 
debt  or  other  obligation. 

Liquidated  damages.  Agreed  or  as- 
certained damages,  not  uncertain 
damages. 

Majority.  Full  legal  age ;  usually 
twenty-one  years. 

Minority.    Under  legal  age;  infancy. 

Municipal  law.  The  law  of  a  partic- 
ular country  as  distinguished  from 
international  law. 

Negligence.  A  failure  to  use  the  care 
that  a  reasonably  prudent  man  would 
use  under  like  circumstances. 

Next  of  kin.  Those  relatives  who  share 
by  law  in  the  personal  property  of  a 
deceased  person. 

Nominal  damages.  A  trifling  sum 
awarded  to  vindicate  a  legal  right 
where  no  substantial  damages  have 
been  suffered. 

Notary  public.  A  public  officer  author- 
ized to  certify  or  attest  documents, 
take  acknowledgments  of  deeds,  etc. 

Nuisance.  A  wrongful  act  which  dis- 
turbs another  in  the  enjoyment  of 
real  property  or  of  a  public  highway. 

Obligation.  A  legal  duty  to  do  or  not 
to  do  a  certain  thing.  \\\  obligor  is 
one  who  has  undertaken  an  obliga- 
tion. An  obligee  is  one  entitled  to 
the  performance  of  an  obligation. 

Orphans'  court.  The  name  given  to 
the  probate  court  in  a  few  states. 

Ownership.  The  right  to  possess  and  use 
Ijtojierty  to  the  exclusion  of  others. 

Parol.  \  word  or  speei  li ;  that  whii  h 
is  expressed  orally,  not  in  writing. 

Patent.  An  exclusive  right  granted  by 
the  government  to  make,  use.  and 
vend  an  article. 


,10 


GLOSSARY 


Per  procuration  (abbreviated  "per pro."). 
Hy  pro,\y.  Used  in  Kiigland  to  indi- 
cate an  agent  that  is  acting  under  a 
special  or  limited  authority. 

Personal  representative.  An  execu- 
tor or  administrator  of  a  deceased 
person.  The  "real  representative" 
is  the  heir  of  the  deceased  person. 

Plaintiff.  The  person  who  brings  an 
action  in  a  court. 

Pleadings.  The  written  allegations  as 
to  claims  and  defenses  in  an  action 
in  a  court. 

Post  (Latin)  after.  Used  in  referring  to 
a  subsequent  portion  of  a  book. 

Prescription.  Title  by  adverse  posses- 
sion. The  law  indulges  the  fiction 
that  there  was  a  prior  writing  which 
is  now  lost. 

Probate.  To  prove,  as  to  probate,  or 
prove,  a  will.  A  probate  court  is 
one  in  which  wills  are  proved. 

Proof.  The  establishment  of  a  fact  by 
evidence. 

Pur  (sometimes  per)  autre  vie  (French). 
For  another's  life. 

Quantum  meruit  (Latin).  As  much  as 
he  deserved.  Refers  to  an  action 
for  the  reasonable  value  of  serv- 
ices. 

Quantum  valebant  (Latin).  As  much 
as  they  were  worth.  Refers  to  an 
action  for  the  reasonable  value  of 
goods  sold  and  delivered. 

Quasi {Lditin).    Like;  corresponding  to. 

Ratification.  The  confirmation  of  a 
previous  contract  or  act  which  is  not 
binding. 

Receiver.  A  person  appointed  by  a 
court  to  take  possession  and  control 
of  property  pending  litigation  and 
some  final  decree  of  the  court. 

Recording  acts.  Statutes  providing  for 
the   recording   of  deeds,   mortgages. 


etc.  in  some  public  office,  and  pro- 
viding that  the  record  shall  be  con- 
structive notice  to  all  subsequent 
purchasers  or  encumbrancers. 

Redemption.  The  act  by  whicli  a  mort- 
gagor, pledgor,  etc.  reclaims  the  title 
and  possession  of  the  property  by 
])aying  the  debt  so  secured. 

Release.  The  giving  up  of  a  claim,  by 
the  person  entitled,  to  the  person 
against  whom  it  exists. 

Replevin.  An  action  to  recover  posses- 
sion of  goods. 

Rescission.  The  canceling,  or  annul- 
ling, of  a  contract  or  deed. 

Residuary  devisee.  The  person  wlio 
under  a  will  takes  all  the  lands  of 
the  testator  not  specifically  devised. 

Residuary  legatee.  The  person  who 
under  a  will  takes  all  the  personal 
property  of  the  testator  not  specifi- 
cally bequeathed. 

SS.  An  abbreviation  used  after  the 
statement  of  the  venue  (state  and 
county)  and  supposed  to  be  a  con- 
traction of  scilicet  {scire  licet),  mean- 
ing "as  one  may  leara,"  or  "to  wit," 
or  "namely." 

Seised.  The  technical  term  describing 
the  possession  of  a  fee  in  lands.  This 
is  the  verb.    The  noun  is  "seisin." 

Seisin.  Under  the  feudal  system  the 
completion  of  the  formalities  by  which 
one  was  given  possession  of  a  fee  in 
lands.    Now  the  possession  of  a  fee. 

Set-off.  A  counter  claim  or  cross  de- 
mand which  a  defendant  sets  up 
against  the  claim  of  the  plaintiff. 

Simple,  (a)  In  real-property  law,  ab- 
solute, unconditional,  as  fee  simple; 
(/>)  in  contract  law,  unsealed. 

Specialty.    A  contract  under  seal. 

Specific  performance.  A  decree  by  an 
equity  court  that  a  party  shall  actu- 
ally   perform    his    contract    promise 


GLOSSARY 


311 


instead  of  paying  damages  for  the 
breach. 

Status.    Legal  position  or  condition. 

Statute.    An  act  of  the  legislature. 

Statute  of  Limitations.  A  statute  fi.\- 
ing  a  time  within  which  actions  must 
be  brought. 

Stock.  ((?)  The  total  capital  put  into  a 
corporate  enterprise;  (6)  the  interest 
of  each  stockholder  in  the  corporation. 

Subrogation.  The  substitution  of  one 
person  in  the  place  of  another  with 
respect  to  rights,  claims,  or  securities. 
The  verb  is  "  to  subrogate." 

Subscribe.  To  write  under;  to  write 
the  name  under  the  contract.  To 
sign  is  to  write  the  name  at  any  place, 
not  necessarily  underneath. 

Successor.  One  who  succeeds  another. 
Used  to  describe  those  who  constitute 
a  corporation  after  the  retirement  of 
preceding  corporators. 

Suit.  A  proceeding  in  a  court.  It  is 
not  uncommon  to  call  a  proceeding 
in  a  law  court  an  action,  and  one  in 
an  equity  court  a  suit;  but  this  is  not 
a  necessary  distinction. 

Supra  protest.  Over  protest.  Used  in 
the  sense  of  "after  protest." 

Surrogate.  Literally,  one  who  is  sub- 
stituted for  another.  By  ])resent 
usage  the  judicial  officer  who  presides 
over  a  probate  court  for  the  admin- 
istration of  the  estates  of  deceased 
persons. 


Testator.  One  who  makes  a  will.  The 
feminine  is  "  testatrix." 

Title,  (ii)  The  right  to  property;  (/>)  the 
evidence  of  the  right  to  property. 

Tort.  A  wrongful  act,  other  than  a 
mere  breach  of  contract,  for  which  a 
common-law  court  will  give  damages. 

Transcript.  An  official  copy  of  a  court 
record,  as  a  transcript,  or  certified 
copy,  of  a  judgment. 

Treasure-trove.  Treasure  found.  (TrcnJ, 
Old  French  for  "  found.")  Gold  or 
silver  or  money  found  hidden  in  a 
secret  place. 

Trespass  (Old  French  fres/asser,  to  pass 
over  or  beyond).  To  invade  another's 
right  of  security  of  person  or  of  prop- 
erty. Commonly,  to  enter  another's 
lands  wrongfully. 

Trover  (Old  French  trover,  to  find).  An 
action  for  the  recovery  of  damages 
for  the  conversion  of  goods,  based 
originally  on  a  fiction  that  the  de- 
fendant had  found  the  goods  and 
refused  to  return  them  to  the  right- 
ful owner. 

Trustee.  A  person  appointed  to  exe- 
cute a  trust. 

Ultra  vires  (Latin).  Beyond  the  power. 
.\])plied  to  acts  of  corporations  be- 
yond tlie  charter  powers. 

Unilateral.  Onesided.  Ap]ilied  to  con- 
tracts where  only  one  jironiise  is  still 
unperformed. 


Tenant.  Broadly,  one  who  holds  land  ; 
specifically,  one  who  holds  land  for 
life  or  for  years;  popularly,  one  who 
holds  land  for  years  of  a  landlord  or 
lessor. 

Testament.  That  which  is  witnessed. 
The  word  is  employed  as  a  synonym 
for  "will."  Formerly  it  meant  a  will 
of  personalty,  but  now  it  is  used  inter- 
changeably with  the  term  "will." 


Vendor.  The  seller.  Usually  applied 
to  the  seller  of  real  properly. 

Venue.  (</)  Locality ;  place.  (/>)  The 
heading  of  legal  documents  showing 
the  state  and  county. 

Verdict.  The  decision  of  a  jury  ujion 
matters  submitted  to  it. 

F/s  mq/or  (Latin).  Superior  fone.  In- 
cludes more  than  an  act  of  dod,  as 
the  act  of  a  public  enemy. 


1  2 


GTX^SSARY 


Void.  Null;  of  no  effect.  Thi-s  is  the 
correct  meaning,  but  tiie  term  is  some- 
times used  in  the  sense  of  "  voidable." 

Voidable.  Capable  of  being  rendered 
void,  usually  at  the  election  of  one 
party  to  a  contract. 

Waiver.  The  surrender  of  some  right 
or  privilege  which  the  law  gives. 

Waste.  The  name  given  to  any  act  of 
a  tenant  whereby  the  value  of  the 


reversion  is  diminished,  as  the  cut- 
ting of  trees. 

Will.  A  written  instrument  executed 
as  the  statute  directs,  by  which  a 
person  makes  a  disposition  of  his 
property  to  take  effect  after  his 
death. 

Witness,  (a)  One  who  gives  evidence 
in  a  court ;  {/>)  one  who  sees  a  docu- 
ment executed  and  signs  his  name  to 
it  as  evidence  thereof. 


INDEX 


[Numbers  refer  to  pages] 


Abstract  of  title,  283 
Acceptance,  of  bill,  163,  1S1-1S5 

for  honor,  184 

of  offer,  13-17 

and  receipt,  68 
Accession,  298-300 
Accident  insurance,  123 
Accommodation  indorser,  187 
Accounting,  by  agent,  215 

by  partner,  239 
Act  of  God,  106,  108 
Action.    See  Remedies 
Administrative  law,  3,  48 
Admiralty  court,  8 
Adverse  possession,  282 
Agency,  205-226 

by  necessity,  212 
Agent,  38,  68,  131 

appointment  of,  207-213 

authority  of,  217-220 

of  a  corporation,  253 

liability  to  third  parties,  222-223 

obligations  to  principal,  214-216 
Agreement  in  contract,  12-16 
Air,  273 

Alteration  of  contract,  153,  180 
Animals,  294 
Answer,  8 

Antecedent  debt  as  value,  64 
Appointment  of  agents,  207-213 
Assault  and  battery,  5,  30 
Assignment,  of  contract,  46-49 

of  lease,  291 

of  mortgage,  282,  286 
Attorney  at  law,  220 
Auctioneers,  220 
Authority,  of  agent,  217-222 

of  corporate  officers,  253 

of  partner,  236-238 


Baggage,  117 

Bailee's  duties,  94,   95,  96-97,  98-99, 

loo-ioi,  103 
Bailment,  90-1 18 

carriers  of  passengers,  1 16-1 18 

common  carriers,  107-116 

gratuitous,  93-95 

innkeepers,  104-107 

mutual-benefit,  97-IC4 

telegraph  companies,  i  iS 
Bailor's  duties,  94,  96,  98,  100,  102 
Bank  deposits,  144-145 
Bankruptcy,  48,  56-58,  242 
Banks,  104,  142-144 
Barter,  66,  91 
Bilateral  contract,  14 
Bill,  of  exchange,  163 

of  lading,  1 12 

of  sale,  65,  66 
Bills  in  a  set,  163 
Blanks  in  bill  or  note,  174 
Bcna p,ie  holder  for  value,  63,  177 
JJond,  19,  26,  27,  169,  256 
Boycott,  45 
Breach,  of  contract,  53-56,  S3-S4 

of  warranty,  80 
Brokers,  219 
Business,  i 
Business  law,  2 
Buyer's  duties,  75 

(all,  29 
Capital,  135 

Carriers,  of  goods,  107-116 
of  passengers,  1 16,  228 
Cashier,  220 
Cashier's  check,  167  " 
Casualty  insurance,  124 
Cattle  trespass,  273 


3«3 


314 


INDEX 


C<n'{-<t/  emptor,  36,  79,  177 
Certificate,  of  deposit,  145,  165 

of  incorporation,  249 

of  protest,  195 
Certified  checks,  199 
Champerty,  30 
Chancery  court,  7 
Charter  of  a  corporation,  249 
Charter  party,  1 1 2 
Chattel,  personal,  4,  294 

real,  4,  198,  199,  294 
Chattel  mortgage,  302 
Checks,  50,  136,  144,  166 
Chose  in  action,  4,  62,  66,  294 
Clayton  Act,  31 
Clearing  house.  136 
Clearing-house  certificates,  137 
Clubs,  207 
CO.  D.  sales,  74 
Codification,  2 
Collateral  security,  97,  172 
Commercial  agencies,  136 
CommoJatiim,  92 
Common  carriers,  107-116 
Common  law,  2 
Communication,  of  acceptance,  14 

of  offer,  14 

of  revocation,  16 
Community  property,  269 
Compensation,  in  agency,  213 

in  bailment,  loi,  102 

in  corporations,  253 

in  partnership,  239 
Complaint,  8 

Composition  with  creditors,  21 
Compound  interest,  141 
Concealment,  36,  128 
Conditional  sales,  63 
Confusion  of  goods,  91,  300 
Consent,  reality  of,  33-37 
Consideration,    19-23,    26,    63-66,    90, 

150,  161,  173 
Constitutional  law,  3 
Contracts,  5,  11-59 

of  bailment,  90-118 

of  carriers,  109-112 

negotiable,  159-199 


Contracts  of  guaranty,  149-157 

of  insurance,  122-134 

of  sale,  61 -89 

to  sell  lands,  274,  275 
Contribution,  125,  132,  156 
Conveyances  of  lands,  276 
Corporations,  207,  236,  248-259 
Corporeal  property,  4,  262 
Coupons,  169 
Courts,  6,  7 

admiralty,  8 

equity,  7 

law,  7 
Covenants,  276,  288 
Credit,  136 
Creditors,  of  a  corporation,  257 

of  partnership,  241-242 
Criminal  law,  3,  27 
Crops,  25,  67,  271 
Cumulative  voting,  253 
Currency,  137 
Current  funds,  137 
Curtesy,  estate  of,  265 
Custom,  2,  48,  218 

Damages,  54,  81,  84 

Date  of  bill  or  note,  173 

Days  of  grace,  161 

Death,  17,  48,    53,  97,   154,    212,    242, 

263 
Deceit,  5,  35 
Deed,  19,  276,  278 
Defenses    to    negotiable    instruments, 

179-181 
Del  credere  agent,  216 
Delegation  by  agent,  215 
Delivery,  by  carrier,  iii 

of  deed,  276 

of  negotiable  instrument,  174 

by  seller,  75 
Demand  bills  or  notes,  177,  189 
Deposit  (depostlitm),  92 
Deposits  in  banks,  104,  144 
Description,  sale  by,  70,  77 
Directors  of  a  corporation,  253 
Discharge,  of  contract,  13,  49-58 

of  guarantor,  152-155 


INDEX 


315 


Discharge,  of  mortgage,  2S2,  2S7 

Discount,  145 

Dissolution,  of  corporation,  258 

of  partnership,  242 
Distress,  292 
Dividends,  256 
Divisible  contracts,  32,  53 
Dormant  partner,  238 
Dower,  265 
Draft,  167 

Drawee  of  bill,  163,  172,  184 
Drawer  of  bill,  163,  186 
Duress,  36 

Earnest  money,  24 
Easements,  274 
Emblements,  271 
Employers'  liability  acts,  229 
Equitable  estates,  269 
Equity  courts,  7 
Escrow,  277 
Estates,  4,  261,  264-269,  296 

of  inheritance,  264 

for  years,  265,  288 
Estoppel,  131,  218 
Exchange,  138 
Executed  contract,  14 
Executed  sale,  62 
Execution,  9 
Executory  contract,  14 
Executory  sale,  62 
Express  contract,  14 
Express  warranty,  76 

Factor,  219 

Tactors  Acts,  63 

federal  reserve  bank  notes,  1 38 

Federal      reserve      banking      system, 

•43 
Federal  Trade  ('ommission,  31 
Federal  Uniform   liills  of  leading  Act, 

1 12 
Fee-simple  estates,  264 
Fee-tail  estates,  264 
Fellow  servant,  228 
Fences,  273 


Fidelity  insurance,  124 
Finder  of  lost  property,  91,  297 
Fire  insurance,  124 
Fitness,  warranty  of,  78 
Fixtures,  271-273 
Foreclosure,  98,  282 
Foreign  exchange,  138 
Forgery,  iSo,  211 
Forms  of  documents : 

Acceptances  of  bill,  182 

Assignment,  of  contract,  39 
of  mortgage,  286 

Bill,  of  exchange,  163 
of  lading,  1 13 
of  sale,  65 

Bills  in  a  set,  164 

Bond,  27,  168 

Bond  coupons,  169 

Cashier's  check,  167 

Certificate,  of  deposit,  166 
of  incorporation,  249 
of  protest,  195 

Certified  check,  167 

Check,  i66 

Contract,  37-39 

Contract  of  sale,  69 

Discharge  of  mortgage,  287 

Guaranty,  156 

Indorsements,  176 

Land  contract,  275 

Lease,  289 

Letter  of  credit,  1S3 

Mortgage,  284 

Notice  of  dishonor,  197 

Tartnership  agreement,  244 

Power  of  attorney,  209 

Promissory  note,  165 

Protested  note,  196 

Puts  and  calls,  29 

Stock  certificate,  251 

Transfer  of  stock  certificate,  251 

Warranty  deed,  27S 

Will,  281 
Fraud,  35.  63,  180,  222 
Frauds,  Statute  of,  23-25,  66-68 
F'rcchold  estates,  264 
/''met in  iHi/intri<tlff,  271 


3i6 


INDEX 


Fnuttis  uatu rales,  270 
Fungible  goods,  72 
F"utures,  29 

Gambling  contracts,  2S,  33 
Garage  keepers.  103 
General  agent,  218 
General  average,  132 
General  manager,  254 
General  partnership,  236 
Gift,  300 

causa  mortis,  301         ' 

inter  vivos,  300 
Good  faith,  128,  178,  215,  238 
Good  will,  243,  296 
Goods,  62,  66 
Grace,  days  of,  161 
Gratuitous  agent,  216 
Gratuitous  bailment,  93-95 
Gratuitous  promise,  19 
Guaranty,  38,  149-157.  188 
Guaranty  insurance,  124 
Guests  of  an  innkeeper,  105 

Habendum,  277 

Heir,  280 

Hereditaments,  263 

Hiring  in  bailment,  92,  99-104 

Holder  in  due  course,  177-181 

Homestead  estate,  265 

Illegality,  22,  27-33,  155 
Implied  contract,  14 
Implied  warranties,  77-79 
Impossibility    of   performance,    51-53, 

213 
Incorporeal  property,  4,  262 
Indefinite  agreements,  13 
Indemnity,  125,  150,  155,  214 
Indivisible  contracts,  32,  53 
Indorsement,  175-177 
Indorser's  contract,  186-188 
Infants,  17,  155,  207,  238 
Initial  carrier,  11 1 
Injunction,  11,  45 
Innkeepers,  104-107 


Insanity,  18,  207,  213,  242 

Insolvency,  56,  57 

Insurable  interest,  127 

Insurance,  30,  122-133,  232 

Interest,  140-141,  146 

International  law,  3 

Interstate  Commerce  Act,  31,  108,  no, 

I II 
Intoxication,  19 
Irregular  indorser,  187 
Irrevocable  agency,  213 

Joint  agents,  208 

Joint  obligations  of  partners,  240 

Joint  and  several  obligations,  240 

Joint  tenancy,  268 

Joint-stock  companies,  235,  243 

Judgment,  8,  283 

Land,  262,  270 

Landlord  and  tenant,  288-292 

Lateral  support  of  land,  273 

Law,  1-3 

Lease,  288-292 

Legal-tender  money,  50,  137,  138 

Letter  of  credit,  184 

Levy,  9 

Libel,  5 

Lien,  bailee's,  103 

Liens,  factor's,  219 

garage  keeper's  103 

on  property,  283 

seller's,  82 
Life  estates,  264 
Life  insurance,  123 
Limitation  of  liability,  no 
Limited  partnerships,  238 
Loans,  145 

Lobbying  contracts,  30 
Lost  property,  90,  297 

Mail,  notice  of  dishonor  by,  192,  193 

offer  by,  14 
Maker's  contract,  181 
Mandate  (mandatum),  92 
Marine  insurance,  124,  \xz 


INDEX 


317 


Married  women",  19,  49,  207,  238,  280, 

302 
Master  and  ser\-ant,  22S-232 
Memorandum  of  sale,  68 
Minerals,  270 
Misrepresentation,  35 
Mistake,  33 
Money,  137 
Moral  obligation,  20 
Mortgage,  147,  282,  302 
Mutttum,  92 

Names,  296 

National  banks,  142 

Necessaries,  17,  18,  212 

Negligence,  5,  94,  96,  98,  100,  103,  104, 

106,  117,  118,  125,  216,  227-232 
Negotiability,  47,  162,  170-173 
Negotiable  instruments,  159-199,  221 
Negotiable  Instruments  Law,  170 
Negotiation,  175 
Next  of  kin,  282 
Nonvital  term,  54,  55 
Notary,  194-196 
Notice,  of  defect  in  bill  or  note,  179 

of  dishonor,  191-194,  197 

by  guarantee,  151 
Noting  of  protest,  196 
Novation,  12 

Obligation,  5 
Occupancy,  title  by,  297 
Offer  and  acceptance,  13-17 
Officers  of  a  corporation,  253 
Open  policy,  123,  125 
Opinion,  36,  77 
Option  contracts,  16,  29 
Orphans'  court,  7 
Ostensible  partner,  237 
Overdue  bills  or  notes,  177 

Part  payment,  68 
Partnership  agreement,  244 
Partnership  real  estate,  269 
Partnerships,  208,  235-243 
I'asscngers,  1 17,  228 
Past  consideration,  z\ 


Pawn.    See  Pledge 
Pawnbrokers,  99 
Payment,  68,  76,  140 

for  honor,  191 

of  smaller  sum,  21  , 

Performance  of  contract,  50,  75 
Personal  property,  294-302 
Pledge,  97-99 
Policy,  of  insurance,  123 

open,  123 

valued,  123 
Power  of  attorney,  209,  217,  252 
Power  coupled  with  an  interest,  213 
Powers,  of  an  agent,  217-222 

of  a  corporation,  254    • 

of  a  partner,  239-240 
Preferred  stock,  256 
Presentment  for  acceptance,  185 
Presentment   of  bill   or  note  for  pay- 
ment, 18S-191 
Price,  66,  84 
Principal,  and  agent,  205-223 

and  third  party,  217-223 
Probate  court,  7 
Procedure  in  courts,  3,  8,  g 
Promissory  note,  165 
Property,  4 

in  goods,  62 

in  lands,  261-292 

in  personalty,  294-302 
Protest,  194-198 
Provisions,  sale  of,  79 
Public  enemy,  108 
Purchaser  in  due  course,  63,  177 
Puts  and  calls,  29 

Qualified    acceptance    of    bill    of    ex 
change,    181 
of  offer,  1 5 
Qualified  Indorsement,  175 
Quasi-contracts,  6 
Quitclaim  deed,  276 

Ratification,  i8.  210-21 1 
Real  property,  4,  67,  261-292 
Receipt,  140 
Receiver  2  58 


318 


INDEX 


Receiver's  certificate,  25S 

Kcexchange,  19S 

Referee  in  case  of  need,  1S4 

Reinsurance,  124 

Release,  13,  49 

Remainder,  estate  of,  267 

Remedies,  for  breach  of  contract,  54, 

83-S5 

for    breach    of    contract    of   sale, 

81-S5 

for  breach  of  warranty.  So 

of  corporate  creditors,  257 

of  firm  creditors,  241-242 

of  landlord,  291 

Rent,  291 

Repairs  under  a  lease,  290 

Report  of  corporation,  257 

Representations  in  insurance,  129 

Resale,  82-83 

Rescission,  49,  83 

Restraint  of  trade,  31 

Restrictive  indorsement,  176 

Reversion,  estate  of,  267 

Revocation,  of  agency,  212 
by  guarantor,  1 53 
of  offer,  16 

Reward,  offer  of,  14,  22 

Risk  by  servant,  229 

Risk  of  loss  of  goods,  74 

Safe-deposit  company,  104 

Sales  of  goods,  61-85 

Sample,  sale  by,  78 

Savings  banks,  143 

Seal,  25,  173,  210 

Sealed    instrument,    20,    25,    221.    See 

Deed 
Security  for  loans,  146 
Seller's  duties,  75 
Seller's  lien,  82 
Servant,  227-232 
Sherman  Anti-Trust  Act,  31 
Simple  contract,  19 
Slander,  5 
Special  agent,  218 
Specialty,  19 
Specific  goods,  70-72 


Specific  performance  of  contracts,  12, 

55 
Standard  fire-insurance  policy,  131 

Stare  t/ecisis,  2 

State  banks,  142 

Statute  law,  2 

Statute  of  Frauds,  23-25,  66-69,   •5°' 

210,  288 
Statute  of  Limitations,  22,  24,  27,  55 
Stock  certificate,  251 
Stock  corporations,  248 
Stockholders,  250,  255,  257 
Stoppage  in  transitu,  82 
Subagent,  208,  215 
Subletting  by  tenant,  291 
Subrogation,  125,  133,  156 
Subscriptions,  21 
Substantial  performance,  50 
Substituted  contract,  49 
Suicide,  126 
Surety,  149,  154 
Surrogate's  court,  7 

Telegraph  companies,  118 
Telephone  companies,  118 
Tenancy,  in  common,  268 

by  entireties,  269 

joint,  268 

by  sufferance,  266 

at  will,  266 

from  year  to  year,  266 
Tender,  50,  140 
Tenements,  263 
Third  party,  in  agency,  217-223 

to  contract,  45-46 
Title,  to  goods,  62-66,  69-74 

to  lands,  276,  291 

warranty  of,  77 
Title  insurance,  124 
Torrens  system,  283 
Tort,  5,  45,  227-232 
Trademarks,  295 
Treasure-trove,"  297 
Trees,  25,  270 
Trespass,  5,  273 
Trust,  6,  1 1,  269,  302 
Trust  companies,  142 


INDEX 


Ultra  vires  acts,  255,  256 
Unascertained  goods,  7 ---7-1 
Undisclosed  principal,  220-222 
Undue  influence,  37 
Uniform    Bills    of    Lading    Act,    112, 

161 
Uniform  Sales  Act,  25,  54,  61,  66,  67. 

74.  79.  80,  161,  271 
Uniform  Stock  Transfer  Act,  250 
Uniform    Warehouse    Receipts    Law, 

104,    161 
Unilateral  contract,  14 
Usury,  140 

Value,  20,  63,  178 
Valued  policy,  123,  12  c; 
Vegetable  products,  270 
Verdict,  8 
Vice  principal,  228 
Vital  term,  54 


319 


Void  contracts,  17,  ,8,  207.  See  Illegal 

contracts 
Voidable  contracts,  17,  18,  207 

Wagering  contracts,  28,  125 
Waiver,  49,  ,3,,  ,73,  .-g.  190,  103 
\\  arehouseman,  103,  104 
Warranty,  36,  54 

of  authority,  222 
of  goods,  76-Si 
in  insurance,  i 29 
in  lease,  2S8 

in  sale  of  bill  or  note,  186 
of  title,  ■]■] 
Warranty  deed,  276,  278 
Waste,  290 
Waters.  270,  273 
Wharfinger,  104 
Will,  277,  2S1 

Workmen's  Compensation,  124,  230 
Writing.   See  Statute  of  Frauds 


SOUTHERN  REGIONAL  UBWVRYFACILlTy 


AA    000  695  413    5 


iaiisyiii 


